Strong Earnings Lift Japan, US Stocks Toward Recovery
2026-08-10
Buying Broadens on Strong Earnings
Japan and US stocks are testing a recovery, supported by improving corporate results. In US tech stocks, fears over excessive investment have eased, while money is also flowing into strong performers outside artificial intelligence (AI). Still, the risks of higher interest rates and a renewed flare-up in inflation remain, leaving the durability of the rally uncertain.
On the Tokyo Stock Exchange on the 10th, the Nikkei stock average closed 1363 points higher from the previous Friday at 66,970, rebounding by more than 5500 points from its recent low on July 29. The broader Topix index rose for a fifth straight session to 4100, nearing its record high of 4101 on July 6. Among individual stocks, Recruit Holdings jumped to its daily upper limit after raising its outlook for the year ending March 2027 on the previous Friday.
Koji Nakatsuka, chief investment officer for Japanese equities at Allianz Global Investors Japan, sees buying based on strong earnings spreading beyond AI. He said there is strength in machinery and factory automation (FA) related shares, and that even as China remains sluggish, more companies are beating forecasts on the back of AI demand.
Earnings Also Support the US
US stocks have turned higher since the start of August, with the S&P 500 and the Dow Jones Industrial Average both hitting record highs. Supporting the market is a continued run of strong corporate results in the US as well. According to QUICK and FactSet, earnings per share (EPS) for all S&P 500 constituents in April-June are expected to rise 50% from a year earlier, accelerating from 29% in January-March. Based on market forecasts, full-year 2026 earnings are expected to increase 30%, followed by a 10% gain in 2027.
Mitsuo Matsumoto, chief strategist at Okasan Securities, said the positive effect of AI-related capital spending such as data centers is starting to spread to other sectors. Caterpillar in the US benefited from stronger demand for generators and construction equipment for data centers. By industry in the April-June period, energy posted the largest profit growth, as oil prices surged on the prolonged conflict in the Middle East and majors such as Exxon Mobil lifted earnings. Payments giant Visa also beat market expectations for both revenue and profit, underscoring the resilience of consumer-related demand.
The Selloff May Be Running Its Course
Results from major US tech companies also helped counter concerns about overinvestment in AI. A symbolic case was Microsoft, which said it expects free cash flow (FCF) to remain positive. The spread on its 10-year bond yield narrowed to 0.68% by August 4 from a recent peak of 0.93% on July 28.
Tomohiro Ban, senior credit analyst at Nomura Securities, said financial concerns should ease as massive data center investment eventually peaks, even if FCF turns negative in the short term, because AI investment should contribute to earnings in the future.
The global rebound in equities has coincided with the completion of the unwind from the sharp rally in leveraged AI and semiconductor stocks. In South Korea, money had been flowing into leveraged exchange-traded funds (ETFs) designed to move twice as much as Samsung Electronics and SK Hynix, but when tech shares turned lower in July, the reverse trade intensified. Even so, conditions are now stabilizing. Timothy Moe of Goldman Sachs in the US said current positions are much cleaner than before, helped by a decline in assets under management in leveraged ETFs.
According to EPFR Global, 9.5 billion dollars flowed into US equity funds in the week from July 30 to August 5. Since mid-June, outflow weeks have also been noticeable, but funds have entered for two consecutive weeks recently.
Interest Rates and Inflation Still Lurk
The Nikkei has recovered half of the drop from its June 25 record high to its recent low after the rise on the 10th. However, views differ on how far buying will spread beyond AI and semiconductors. Richard Kaye, portfolio manager at French asset manager Comgest Asset Management, said his funds remain overweight AI and semiconductor shares, but if government and Bank of Japan intervention in the currency market makes the pause in the yen's weakening trend more obvious, a shift into domestic-demand stocks could accelerate.
The weak July US jobs report released on the 7th pushed back expectations for Federal Reserve rate hikes. Market participants are watching whether oil prices, which are currently calm, will rise again and feed inflation pressure or higher interest rates. The US-Iran dispute over transit through the Strait of Hormuz still lacks a clear resolution, and Rie Nishihara, chief equity strategist at JPMorgan Securities, said the outcome of the talks is likely to influence market sentiment through oil prices.
In the FedWatch tool, which derives the market-implied probability of policy rates from prices in the US interest rate futures market, the chance that the Fed will leave rates unchanged at its next Federal Open Market Committee meeting on September 15-16 rose to nearly 60% from the 30% range before the jobs report. Still, if inflation concerns flare again, policy management will become complicated. Nakatsuka of Allianz said markets are highly sensitive to every move by the Fed and that the path of monetary policy must be watched as an uncertain factor.
The BofA Bull & Bear Indicator, which measures the bullishness of global risk money and is calculated by Bank of America, stood at 9.7 as of the 6th, shifting to its most bullish level since 2021. A reading above 8 is considered extremely bullish and a sell signal, while below 2 is considered extremely bearish and a buy signal. Michael Hartnett of BofA said the summer season is encouraging exits from risk assets and a shift into defensive stocks such as consumer staples.
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