Japan Equity Strategy: Reverse rotation in AI stocks: background and outlook

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Japan Equity Strategy: Reverse rotation in AI stocks: background and outlook

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Japan Equity Strategy

Reverse rotation in AI stocks: background

and outlook

Investment Strategy

21 May 2026

Global interest rates surge, trigger correction in AI stocks Investment Strategy

Amid plunging AI stocks, the Nikkei 225 fell below the 60,000 level on 21 May. Fujikura's Japan

results and medium-term plan announcements were also a trigger, but the tumble in AI Masashi Akutsu >>

stocks was a global phenomenon. The main trigger was rising interest rates in major Strategist

BofAS Japan

countries, which led to a correction in the high-P/E AI stocks. Rising interest rates are +81 3 6225 7754

not harmless, as they are driven by expectations of rate hikes by central banks and masashi.akutsu@bofa.com

increased fiscal spending in response to inflation. In particular, when the 10-year US Tetsuhiro Tokuyama >>

Strategist

Treasury yield rises above 4.5%, it tends to have a strong impact on US stocks (Exhibit BofAS Japan

1). The drivers of rising US interest rates were (1) an upside surprise in the employment +81 3 6225 8499 tetsuhiro.tokuyama@bofa.com

report (released on 8 May, Exhibit 2); and (2) a greater-than-expected rise in the CPI

(released on 12 May).

Regarding (2), the PCE (Personal Consumption Expenditure) deflator, which has a high

weighting of IT equipment, has recently risen faster than the CPI (the opposite was

previously the case, Exhibit 3). The components of the April CPI suggest an upside

BoJ: Bank of Japansurprise in the PCE deflator to be released on 28 May (our economists forecast +3.3%

YoY). If the AI investment boom has boosted EPS for AI stocks, but rising interest rates

are now depressing P/Es, the problem is deep-rooted.