Japanese equities

9 October 2026, 04:22 UTC Chief Investment Office GWM Investment Research

Earnings growth to drive the next leg higher Japanese equities Authors: Chisa Kobayashi, Head CIO Japan Equity Strategy, UBS SuMi TRUST Wealth Management Co., Ltd.; Daiju Aoki, Chief Investment Officer Japan and Head Macroeconomics Japan, UBS SuMi TRUST Wealth Management Co., Ltd.

• We maintain an Attractive view on Japanese equities. We expect Topix to break out of its 4,000-4,200 trading range and trend higher into year-end as investor focus shifts back to earnings growth. Despite uncertainty around higher bond yields, markets have largely digested the Fed’s tightening cycle, leaving earnings as the equity driver.

• The upcoming earnings season should provide further support. AI-related semiconductor equipment and supply-chain companies are likely to continue delivering robust earnings growth, while companies’ conservative full-year guidance may be revised upward, leading to raised EPS revisions. Source: UBS • We recommend a barbell investment strategy: high- quality AI beneficiaries with strong earnings visibility (e.g., semi equipment and component makers) on one side, and sectors that benefit from higher interest rates (e.g., financials) on the other. We also see value in cyclical value stocks where solid fundamentals are not yet fully reflected in valuations (e.g., heavy machinery and diversified industrials).

Our view Stock list as of 8 October We maintain an Attractive view on Japanese equities and expect the Tokyo Stock Price Index (Topix) to break decisively above the 4,000-4,200 range that prevailed through August and September. Earnings growth, in our view, will drive the market higher into year-end.

The correction since the June peak has reflected three headwinds: the unwinding of excess optimism in AI and semiconductor-related stocks, higher oil prices, and rising bond yields. While the trajectory of long-term rates remains a source of uncertainty, equity markets have absorbed the start of the Federal Reserve’s tightening cycle without significant disruption and have already discounted much of the expected two to three additional rate hikes over the next 12 months. Source: UBS CIO This is a copy of the Equity Preference List (EPL)/Global Equity Focus List (GEFL): "Japan." For the latest update (which also lists the analyst(s) responsible for the selections and the thematic benchmark), we recommend visiting the UBS WM CIO portal or contacting your Advisor.

This report has been prepared by UBS SuMi TRUST Wealth Management Co., Ltd.. Analyst certification and required disclosures begin on page 6. UBSFS accepts responsibility for the contents of this report. U.S. persons who receive this report and wish to effect any transactions in any security discussed in this report should do so with UBSFS and not UBS AG. Page 1 of 12

Ultimately, the affect of higher interest rates on corporate The market Is transitioning toward a reverse liquidity earnings and the resilience of economic growth will regime determine the equity market outlook. Even in a restrictive That said, higher interest rates remain a headwind for monetary environment, equities can continue to rise when equities. Viewed through the framework of economic economic growth remains resilient and earnings continue growth and monetary policy, the current environment is to expand. Across the ten Fed tightening cycles since the characterized by ongoing economic expansion alongside 1980s, equities typically struggled during the first few a transition from accommodative to restrictive monetary months after rate hikes began. Where recession was avoided conditions (Fig. 2). and earnings growth continued, however, markets resumed their advance even before the tightening cycle ended (Fig. During the April-June quarter, equity returns were supported 1). by both earnings growth and multiple expansion, consistent with an earnings-driven market environment. More recently, Figure 1 - Equities typically weaken early in a Fed rising bond yields have constrained further valuation tightening cycle but recover after the first several expansion, increasing the market's reliance on earnings growth as the primary…