Japanese equities may shift from the AI semiconductor theme to a mini rotation driven by earnings realization

Overview

The report focuses on Japan's Apr-Jun earnings season. Its core view is that the marginal impact of earnings on share prices will increase, with a mini rotation already emerging from AI semiconductor-led performance toward sectors with improving earnings but lagging share prices. J.P.Morgan expects AI servers, semiconductor production equipment, electronic components, and electronics leaders to continue confirming strong earnings, but high valuations and elevated expectations could amplify volatility when results fall below consensus. By contrast, IT services, software, AI application companies, and industries benefiting from lower oil prices and improved cost pass-through may benefit from capital reallocation if earnings confirm strong fundamentals.

Core views

The core views are: first, the Apr-Jun earnings season is more likely than Jan-Mar to act as a catalyst for Japanese stock prices; second, the long-term growth logic for AI semiconductors has not been invalidated, but the short-term market needs to distinguish between AI-related companies that can genuinely deliver profit growth and those that cannot; third, among non-AI sectors, banks, pharmaceuticals, transportation, insurance, capital goods, energy, and consumer goods with strong earnings but lagging share prices may attract more capital; fourth, lower oil prices are favorable for potential future earnings upgrades in electricity and gas, transportation and logistics, materials and chemicals, and construction; fifth, changes in guidance from food, automobile, defense, and banking companies warrant close attention, particularly the possibility of upgrades during autumn 1H results.

Analysis framework

The report combines earnings-season timing, TOPIX sector performance, EPS revisions, valuations, the BoJ Tankan survey, input and output price DIs, oil-price sensitivity, the proportion of companies revising guidance, TOPIX buyback volumes, and sector analyst views to assess which Japanese sectors offer opportunities for earnings realization, earnings upgrades, or valuation recovery.

Methodology notes

• Macro and sector conditionsBoJ Tankan survey

  Business conditions DIs, input price DI, and output price DI for large manufacturers and non-manufacturers

  The report uses the Tankan survey to assess the environment for Japanese corporate sales and margins: business conditions among large manufacturers improved to an eight-year high, while the non-manufacturing DI remained elevated, but gaps in margins and price pass-through deteriorated in some sectors.

• Earnings and valuationEPS revisions and 12-month forward P/E

  Sector EPS revisions, share-price performance, and valuation decomposition

  The report compares sector earnings revisions with share-price performance to identify sectors with strong fundamentals but lagging share prices, while assessing volatility risks in AI-related sectors with elevated expectations.

• Cost sensitivityOil-price sensitivity analysis

  Impact of crude oil price changes on corporate net income

  The report uses oil-price sensitivity to identify beneficiaries of lower oil prices, focusing on the potential for earnings upgrades in electricity and gas, transportation and logistics, materials and chemicals, and construction.

• Corporate actionsCapital policy monitoring

  Share buybacks and corporate governance reform

  The report believes that full-year guidance revisions and capital policy announcements are usually limited during the Apr-Jun earnings season, but management commentary on the use of excess capital and buyback policies is worth monitoring ahead of the revision of corporate governance guidelines in summer 2026.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• AI semiconductors, AI servers, semiconductor production equipment, electronic components

  Both the leading theme of the previous rally and the focus of validation in the current earnings season

  Strengths

  Long-term AI demand and server investment continue to support earnings growth, and related equipment and component companies may continue to confirm strong fundamentals.

  Weaknesses

  Valuations of some securities have risen rapidly following upgrades to expectations.

  Comparison

  Compared with non-AI sectors, AI-related stocks face higher earnings hurdles and market expectations.

  Risks

  Slowing earnings, results below consensus, or rotation away from the AI theme could all amplify share-price volatility.

• IT services, software, AI application companies

  Potential beneficiaries of the rotation

  Strengths

  Valuations have lagged, and if earnings confirm strong performance, these companies may benefit from capital flowing out of AI semiconductors.

  Weaknesses

  They were previously pressured by concerns about AI disruption, and some mid-sized systems integrators and SaaS companies still need to confirm their earnings.

  Comparison

  Compared with the AI hardware chain, market expectations are lower, so the marginal impact of an earnings surprise could be greater.

  Risks

  If earnings recovery falls short of expectations or share prices have already anticipated the improvement, the reaction may be muted.

• Electricity and gas, transportation and logistics, materials and chemicals, construction

  Sectors benefiting from lower oil prices

  Strengths

  Lower crude oil prices are expected to improve cost structures and drive earnings upgrades.

  Weaknesses

  The ability to pass through prices differs across sectors, so margin improvement will be uneven.

  Comparison

  Compared with high-expectation growth sectors, these industries depend more on cost reductions and guidance upgrades as catalysts.

  Risks

  A renewed rise in oil or raw material prices, supply constraints, or insufficient price pass-through could weaken earnings improvement.

• Food

  Cost pass-through and price-increase theme

  Strengths

  The report expects the investment environment to improve from the second half of 2026 through 2027 as price adjustments progress.

  Weaknesses

  The sector is under short-term pressure from rising packaging and other materials costs, and earnings may remain weak.

  Comparison

  Compared with sectors already benefiting from lower oil prices, improvement in food depends more on successful price pass-through.

  Risks

  A weaker yen, unstable oil prices, rising costs, and weak consumer demand could delay improvement.

• Automobiles, defense, banks

  Potential sectors for autumn 1H guidance upgrades

  Strengths

  The report believes these sectors may raise earnings guidance in their October-November 1H results, with Apr-Jun earnings communications providing an early indication.

  Weaknesses

  Full-year guidance upgrades are usually limited during the 1Q stage.

  Comparison

  Compared with sectors offering immediate earnings catalysts, their catalysts are more back-loaded.

  Risks

  Conservative management communication, changes in the macro environment, or insufficient earnings realization could lead to disappointment.

• Cosmetics, personal care, paper and packaging, retail

  Sectors treated cautiously or requiring selective stock picking in the report

  Strengths

  Some retailers posted strong sales in Apr-May, while product mix differentiation offers opportunities within paper and packaging.

  Weaknesses

  Cosmetics faces a slow recovery in China and intense domestic competition; personal care is affected by the Middle East conflict; paper and packaging are exposed to raw material and fuel price fluctuations; retail overall requires selective stock picking.

  Comparison

  Compared with sectors showing earnings improvement such as banks, pharmaceuticals, and transportation, these industries face greater uncertainty.

  Risks

  Weak Chinese consumption, raw material price volatility, declining customer traffic, and cost pressures could weigh on earnings and valuations.

Key data

• Earnings-season impact assessmentThe impact of earnings on share prices is expected to be greater in the Apr-Jun earnings season than in Jan-MarThe report believes that recent market rotation and volatility have increased the importance of earnings realization.
• AI semiconductor statusLong-term growth expectations unchanged, but short-term volatility risingIf valuations already substantially reflect expectations, even moderate deceleration or results below consensus could trigger share-price volatility.
• Tankan signalLarge-manufacturer business conditions improved to an eight-year high, while the non-manufacturing DI remained elevatedAt the same time, the gap between input and output prices deteriorated, suggesting that some sectors may see improving sales but pressured margins.
• Sectors benefiting from lower oil pricesElectricity and gas, transportation and logistics, materials and chemicals, constructionThe report believes that lower crude oil prices may drive future earnings upgrades in these sectors.
• TOPIX buybacks during the 2025 Apr-Jun earnings seasonApproximately ¥1.7 trillionThis indicates that capital policy announcements are usually limited during the earnings season, although management commentary ahead of corporate governance reform should still be monitored.
• Rating distribution disclosureWithin J.P.Morgan's global equity research coverage, 53% Overweight, 36% Neutral, and 12% UnderweightThis is disclosed information and does not represent the rating of any individual security in this strategy report.

Impact & implications

For portfolios, the report suggests that short-term drivers of Japanese equities may shift from single-theme AI semiconductor valuation expansion toward earnings realization and rebalancing across sectors. If earnings confirm resilience, capital may be reallocated to non-AI sectors with strong fundamentals but lagging valuations; if AI-related companies report earnings below elevated expectations, volatility in high-valuation sectors may intensify. Investors should assess the sustainability of sector rotation by considering earnings communications, guidance, cost pass-through, and capital policies together.

Risks

• AI-related stocks have high valuations, and share-price volatility may rise if earnings growth slows or falls below consensus.
• The Tankan survey shows deterioration in the gap between input and output prices, meaning some sectors may experience improving sales but declining margins.
• Volatility in oil, naphtha, packaging materials, and fuel prices could alter the logic of beneficiaries of lower oil prices and cost pass-through.
• Consumer-related sectors such as food, retail, and cosmetics remain affected by real wages, consumer sentiment, Chinese demand, and weather conditions.
• Full-year guidance upgrades and buyback announcements are usually limited during the Apr-Jun earnings season, so catalysts may be delayed until 1H results.
• The report discloses market-making, client, investment-banking, or compensation relationships between J.P.Morgan and several covered companies; the report should be read together with its conflicts-of-interest disclosures.

What to watch

• Whether earnings in the Apr-Jun season actually drive share-price reactions.
• Whether AI servers, semiconductor production equipment, electronic components, and electronics leaders continue to deliver strong earnings.
• Whether IT services, software, and AI application companies show earnings confirmation and valuation recovery.
• Whether electricity and gas, transportation and logistics, materials and chemicals, and construction raise earnings guidance due to lower oil prices.
• Progress in price increases and cost pass-through at food companies.
• Whether automobiles, defense, and banks signal potential autumn 1H guidance upgrades in their Apr-Jun earnings communications.
• Corporate commentary on the use of excess capital, ROE targets, and share buybacks ahead of the revision of corporate governance guidelines.