As Japan stocks stagnate, BoFA favors these sectors

Investing.com-- Japanese stocks traded largely rangebound over the past two months, as a stellar rally in the first quarter was largely offset by a batch of middling profit forecasts, doubts over monetary policy and weakness in the yen.

The Nikkei 225 wallowed well below 40,000 points since end-March, while TOPIX flitted between 2,600 to 2,700 points. Both indexes had surged to record highs in the first quarter.

BoFA analysts said that recent resistance in stock markets could be attributed to conservative guidance- particularly for fiscal 2025, as well as excessive yen depreciation, which did boost corporate earnings, but also presented signs of stagflation, which bodes poorly for the Japanese economy. 

BoFA says watch AI, value stocks 

BoFA analysts said that sectors with relatively better earnings forecasts were financials such as banks and  insurers, along with sectors with heavy exposure to artificial intelligence data centers- such as electric power and transmission. 

“Overall, earnings and share prices did well at companies that should be strong in a stagflation economy, as well as value names and AI-related companies,” BoFA analysts wrote in a note. 

Barring any significant macroeconomic changes, BoFA analysts said that these market conditions were likely to continue in the near-term. 

But they cited two key factors that could alter this trend and improve overall market prospects.

Firstly, they forecast a potential for market gains if companies hiked their “overly conservative” guidance for the fiscal year during their June quarter earnings. 

Secondly, the possibility of easing U.S. inflation, towards the end of the year, presented improved market conditions in the second half of fiscal 2025. 

“In this scenario, core stocks with weaker-than-expected guidance, domestic demand-oriented stocks hurt by yen depreciation, and other undervalued stocks will be reevaluated, creating an upward momentum in the overall market,” BoFA analysts wrote in a note.