Investment in AI and data centers, along with higher defense spending, is expected to remain a focus for Japanese equities in the second half of 2026. The Bank of Japan’s rate hikes and hyperscalers’ capital investment trends will also draw attention, with the potential for earnings growth in the banking sector highlighted.
Japanese equities were led by the AI and semiconductor rally in the first half of 2026, but short-term corrections and sector rotation emerged in July ahead of earnings announcements. Performance between the top- and bottom-performing stocks reversed, while trends in AI- and semiconductor-related stocks remained a focus for the period ahead.
In the US market, AI- and semiconductor-related stocks continued to rise, although attention was drawn to the potential downward pressure on EPS from large IPOs such as SpaceX. The five hyperscalers’ data center investment remains robust, and the global semiconductor market is expected to expand to nearly US$2 trillion in 2027.
In Japan, higher long-term interest rates are expected to benefit the banking sector, with the core net business profit of the three major Japanese banks forecast to improve. Depending on interest rate trends, the spread between lending and deposit yields is expected to continue widening, providing a potential boost to ROE.
Regarding the impact of higher defense spending, defense-related revenue and operating profit margins are expected to improve, and the defense industry is projected to grow over the long term into an area that drives corporate earnings.