Nikkei sees bottoming signs as AI stock correction runs its course

2026-08-02

The Nikkei average is showing signs of bottoming. The decline in artificial intelligence and semiconductor-related stocks that weighed on the market in July has eased, and buying has broadened to lagging shares such as automakers. In the market, the view is growing that the Nikkei will stage a full recovery on the back of April-June 2026 earnings and move back toward 70,000.

AI stock correction runs its course

The Nikkei average fell 5,700 points, or 8%, in July. It remained weak after hitting a record high of 72,366 on June 25, and by July 29 it had dropped more than 10,000 points from that peak. Behind the slide was concern that AI investment by hyperscalers, or large cloud service providers, may have been excessive, which led to a break in AI and semiconductor-related stocks that had driven the index to its peak.

Since then, worries about overinvestment have eased somewhat. In its April-June earnings report released on July 29, Microsoft said it expects free cash flow to remain in the black, helping ease concerns over its capacity to continue capital spending. Amazon.com also reported on July 30 that cloud revenue in the April-June period rose more than the market had expected, driven by higher AI-related revenue.

In Japan, Advantest and Tokyo Electron reported earnings on July 29 and 30. Advantest raised its full-year earnings forecast for the year ending March 2027, confirming strong demand for semiconductor manufacturing equipment. 'From talking with domestic and overseas investors, it looks as if the unwinding of some AI-related long positions is in its final phase,' said Eri Nishihara, chief equity strategist at JPMorgan Securities.

Rotation into lagging stocks

Even so, few expect AI-related stocks to rise again with the same momentum seen through June. 'Market expectations for growth in AI and semiconductors are already high, so even strong earnings are unlikely to have a large effect on share prices,' said Tomoya Kitaoka, chief equity strategist at Nomura Securities.

Kioxia Holdings said on July 31 that its consolidated net profit for July-September, under International Financial Reporting Standards, was expected to rise 31-fold from a year earlier to 127 billion yen. That fell short of the average QUICK consensus forecast of 134.31 billion yen, and the stock fell at times in after-hours trading after the announcement.

On the other hand, the names drawing attention as keys to a sustained rise in the Nikkei are non-AI and non-semiconductor stocks. In July, while the Nikkei, which is more sensitive to AI and semiconductor shares, fell 8.1%, the broader Topix index rose 0.2%. That was due to money flowing into lagging sectors such as automakers and banks.

On July 31, Japan Tobacco, which raised its earnings forecast the previous day, and Oriental Land, which reported record net profit for the April-June period, posted sharp gains. 'If earnings per share for Nikkei constituents can maintain growth of 10% from the previous fiscal year, it would not be surprising for the Nikkei to rise back into the 70,000s,' said Naohide Une, representative of Investment Lab.

What comes next

Among market participants, the prevailing view is that inflows into lagging stocks will gradually push the Nikkei higher. Kohei Onishi, senior investment strategy researcher at Mitsubishi UFJ Morgan Stanley Securities, expects money to move into machinery, construction and utilities on the back of demand for data center construction. Kitaoka said real estate, which had been sold on the back of higher interest rates, also has room to rise, adding that the Nikkei could climb to 78,000 by year-end.

The reporting season for April-June 2026 earnings is now in its middle phase, and from Aug. 3 onward, attention-grabbing companies including Mitsubishi UFJ Financial Group, Toyota Motor and SoftBank Group will follow. If a series of strong results continues, expectations are likely to strengthen that a full recovery in the Nikkei is drawing closer.

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