Japan Equity Strategy: Summer return reversal: Examining the reasons

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Japan Equity Strategy: Summer return reversal: Examining the reasons

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Japan Equity Strategy

Summer return reversal: Examining the

reasons

Investment Strategy

03 July 2026

Sell-off in AI stocks; Nikkei 225 drops sharply Investment Strategy

Since late June, several concerns have emerged around AI stocks, increasing pressure for Japan

a correction. The pace of declines in the Nikkei 225 has also widened. Selling pressure on Masashi Akutsu >>

AI stocks continued in the US equity market on 2 July. However, we believe a significant Strategist

BofAS Japan

driver of the correction was a backlash against highly concentrated positioning. +81 3 6225 7754

masashi.akutsu@bofa.com

The decline in AI stocks in the US market on 2 July reflected (1) a moderation in Tetsuhiro Tokuyama >>

concerns about the Fed raising interest rates following softer employment data, Strategist

prompting fund flows into cyclical stocks outside AI; and (2) concerns about data center +81 3 6225 8499

overinvestment and a peak in memory supply-demand conditions. However, our tetsuhiro.tokuyama@bofa.com

economists and analysts argue that these market concerns are overblown.

Regarding (1), a moderation in expectations for Fed tightening should be positive for AI

stocks with high P/E multiples. Capital had recently been flowing out of non-AI assets

that lacked the growth expectations associated with AI (Exhibit 2). Fed tightening

concerns may have been a key driver, and their easing should further reduce selling

pressure on these assets and stocks. This could trigger a return reversal in stock

selection. However, the downside surprise in employment data was concentrated in

leisure & hospitality and government sectors. We believe seasonal factors are the most

likely explanation.