Japan 1Q3/27 earnings season: FX and AI tailwinds versus elevated earnings expectations
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Japan 1Q3/27 earnings season: FX and AI tailwinds versus elevated earnings expectations
Goldman Sachs expects consensus 1Q earnings growth for Japanese companies with February/March fiscal year-ends in the TOPIX to remain strong. A weaker yen and AI-related stocks support EPS, but high expectations raise downside risk if results disappoint.
- The peak 1Q3/27 earnings release windows are expected to be July 29-31 and August 3-7, covering 38% and 50% of TOPIX companies with February/March fiscal year-ends by market cap, respectively.
- Excluding Softbank Group, I/B/E/S consensus expects 1Q recurring profit for relevant TOPIX companies to rise 22% year over year, and net profit to rise 26% year over year.
- AI-related stocks have contributed nearly half of the change in TOPIX EPS year to date, so expectations are high heading into earnings season, and the absence of clear positive surprises could trigger negative share price reactions.
- Average USDJPY rose from 144 in FY25 Q1 to 159 in FY26 Q1, and Goldman Sachs FX strategists expect it to reach 165 over 12 months; sensitivity analysis shows that for every JPY10 rise or fall in USDJPY, TOPIX EPS rises or falls by 3.5% accordingly.
- The earnings revision index remains in positive territory, with more upgrades in semiconductors & SPE, financials, construction, and machinery, while pharmaceuticals, autos & auto parts, and other materials have seen more notable downgrades.
Report interpretation
Overview
This report previews the 1Q3/27 earnings season for Japanese companies with March fiscal year-ends, focusing on TOPIX constituent earnings consensus, announcement timing distribution, EPS sensitivity to yen weakness, the contribution of AI-related stocks to earnings changes, and the direction of sector earnings revisions. Overall, earnings growth expectations remain strong, but the market bar is high.
Core views
Goldman Sachs believes that, excluding Softbank Group, consensus for TOPIX companies with February/March fiscal year-ends implies 1Q recurring profit and net profit growth of 22% and 26% year over year, respectively, while average recurring profit growth over the next four quarters is expected to be 18% year over year. On FX, yen weakness is a tailwind for TOPIX EPS; on themes, AI-related stocks have contributed nearly half of the change in EPS since the start of the year. However, because investor expectations for AI and earnings growth have already been raised, related companies need to deliver substantial positive surprises to support share price reactions.
Analysis framework
The report mainly uses data from I/B/E/S consensus, Toyo Keizai, FactSet, QUICK, and Bloomberg to analyze earnings growth, announcement cadence, EPS contribution breakdowns, FX sensitivity, and sector earnings revisions for TOPIX companies with February/March fiscal year-ends, while excluding Softbank Group from some earnings measures because of its high earnings volatility.
Methodology notes
Use market consensus to measure pre-earnings-season earnings expectations
The report uses I/B/E/S consensus to estimate year-over-year growth in sales, recurring profit, and net profit for TOPIX companies, in order to assess the level of growth already priced in by the market before earnings season.
The impact of yen exchange-rate changes on TOPIX EPS
The report provides a sensitivity conclusion: for every JPY10 rise or fall in USDJPY, TOPIX EPS increases or decreases by 3.5% accordingly, to assess the earnings tailwind from yen weakness for Japanese companies.
Analyze the relative strength of analyst upgrades versus downgrades
The earnings forecast revision index is defined as the number of analyst upgrades minus the number of downgrades over the past month, divided by the total number of forecasts, and is used to measure earnings expectation momentum.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- TOPIXCore coverage index
- Strengths
- Consensus expects earnings to remain in positive growth in 1Q and over the next four quarters, and earnings growth has contributed an important part of TOPIX returns year to date.
- Weaknesses
- The expectation bar is high, and insufficient earnings delivery could lead to index-level volatility.
- Comparison
- Excluding Softbank Group makes the earnings measure more reflective of the fundamental trend across the broader TOPIX universe.
- Risks
- AI-related stocks underperforming expectations, a reversal in yen moves, and a broader spread of sector earnings downgrades.
- AI-related Japanese stocksImportant contributor to EPS changes
- Strengths
- They have contributed nearly half of the change in TOPIX EPS year to date and are supported by the AI investment theme.
- Weaknesses
- Market expectations have already risen, so sizable positive surprises are needed to continue supporting share prices.
- Comparison
- Compared with ordinary sectors, AI-related stocks have a greater marginal impact on index earnings expectations and market sentiment.
- Risks
- If earnings reports fail to provide materially positive surprises, share price reactions may skew negative.
- Yen-sensitive exporters and overseas revenue companiesEarnings beneficiaries affected by USDJPY
- Strengths
- A weaker yen typically boosts the translation of overseas revenue and export earnings, and the report estimates that every JPY10 rise in USDJPY can lift TOPIX EPS by 3.5%.
- Weaknesses
- Companies' initial FY26 FX assumptions are already below current levels and Goldman Sachs' 12-month forecast, so part of the benefit may already be priced in by the market.
- Comparison
- Compared with domestic-demand companies, FX-sensitive companies are more sensitive to the path of USDJPY.
- Risks
- If the yen strengthens instead, the EPS tailwind may weaken or turn into a headwind.
- Semiconductors & SPE, financials, construction, machinerySectors with more earnings upgrades
- Strengths
- Net profit upgrades over the past three months have been relatively notable, indicating comparatively strong earnings momentum.
- Weaknesses
- After upgrades, market expectations may also be higher.
- Comparison
- Compared with downgrade sectors such as pharmaceuticals, autos & auto parts, and other materials, the earnings revision trend is more favorable.
- Risks
- If orders, interest rates, capital spending, or macro demand evolve worse than expected, the upgrade trend may slow.
Key data
- 1Q consensus recurring profit growth+22% yoyTOPIX companies with February/March fiscal year-ends, excluding Softbank Group.
- 1Q consensus net profit growth+26% yoyTOPIX companies with February/March fiscal year-ends, excluding Softbank Group.
- Average recurring profit growth over the next four quarters+18% yoyI/B/E/S consensus expects positive growth to continue over the next four quarters.
- EPS contribution from AI-related stocksNearly halfAI-related stocks contributed nearly half of the change in TOPIX EPS year to date.
- Change in average USDJPYrose from 144 to 159From FY25 Q1 to FY26 Q1.
- Goldman Sachs 12-month USDJPY forecast165Based on Goldman Sachs FX strategist forecasts.
- TOPIX EPS FX sensitivityFor every JPY10 move in USDJPY, EPS moves 3.5%An increase corresponds to higher EPS, and a decrease corresponds to lower EPS.
- Initial corporate USDJPY assumption for FY26median 151.0, average 152.3Applicable to the sample of companies with February/March fiscal year-ends.
- Announcement completion by July 3146%Announcement completion ratio for TOPIX companies by market cap.
- Announcement completion by August 795%Announcement completion ratio for TOPIX companies by market cap.
Impact & implications
For investors, the short-term earnings narrative for Japanese equities is still supported by profit growth, yen weakness, and the AI theme, but from a trading perspective the more important issue is how actual results deviate from elevated consensus. If earnings reports confirm a broader spread of upgrades, TOPIX's earnings-driven momentum may continue; if AI-related companies fail to meaningfully beat expectations, the market may lean more toward profit-taking or compressing related valuation premiums.
Risks
- AI-related companies may fail to deliver sufficiently large positive earnings surprises, leading to negative share price reactions.
- The market consensus already expects double-digit earnings growth, so modest beats may be insufficient to drive further valuation upside.
- If USDJPY stops rising or the yen strengthens, the FX tailwind for TOPIX EPS may weaken.
- Earnings downgrades in sectors such as pharmaceuticals, autos & auto parts, and other materials may weigh on market breadth.
- Regulatory disclosures note that the research is based only on currently public information, and forecasts and estimates may change.
What to watch
- The proportion of positive and negative earnings surprises during the two peak reporting windows of July 29-31 and August 3-7.
- Whether 1Q recurring profit and net profit for TOPIX companies meet or exceed the consensus growth rates of +22% and +26% excluding Softbank Group.
- Post-earnings share price reactions of AI-related stocks and their marginal contribution to TOPIX EPS expectations.
- Whether USDJPY moves closer to Goldman Sachs' 12-month forecast of 165, and whether companies update their FY26 FX assumptions.
- Whether earnings upgrades continue in semiconductors & SPE, financials, construction, and machinery, and whether downgrades in pharmaceuticals, autos & auto parts, and other materials broaden.