BofA says 15% upside left for Nikkei in 2026

Investing.com -- Bank of America has raised its year-end targets for Japanese equities, forecasting further upside for the Nikkei 225 even as it flags growing concentration risks that warrant caution in the near term.

Analyst Masashi Akutsu lifted BofA's year-end Nikkei 225 target to 76,000 from 67,000 and raised the TOPIX target to 4,400 from 4,200, implying almost 15% upside from current levels for the Nikkei.

The bank said the index could climb as high as 80,000 by year-end. The upward revisions reflect "stronger-than-expected expansion in AI demand and a higher probability of the Strait of Hormuz remaining open."

Akutsu identified a shift in the drivers of return on equity as a key theme to monitor, noting that while margin improvement has historically been the primary engine of ROE growth, "leverage expansion accompanying a recovery in the manufacturing cycle should take over that role" going forward.

Despite the constructive longer-term view, BofA cautioned that stock concentration has reached historically elevated levels, warranting care in the July-to-September period.

The standard deviation of cumulative returns across beta-classified stocks has risen sharply, exceeding peaks seen during the 2013 taper tantrum and the 2021 post-pandemic rally, and is comparable to levels seen after the Resona Bank recapitalization in 2003.

"Over the past 30 years, only the dot-com bubble in 2000 and the peak of the global financial crisis in 2008 had higher levels than now," Akutsu wrote.

BofA said it is appropriate to partially reduce exposure to AI-related stocks with elevated valuations and incorporate non-AI sectors as a hedge.

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