Japan Equity Strategy: Sector rotation after “summer storm”: Assessing base case and risk scenarios

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Japan Equity Strategy: Sector rotation after “summer storm”: Assessing base case and risk scenarios

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Japan Equity Strategy

Sector rotation after “summer storm”:

Assessing base case and risk scenarios

Investment Strategy

24 July 2026

“Summer storm” has largely passed, but instability remains Investment Strategy

The “summer storm” that disrupted stock selection has entered a temporary lull. We Japan

believe concentrated positioning and widening return dispersion were among the factors Masashi Akutsu >>

behind the sell-off in AI-related stocks. Measured by return dispersion, or the standard Strategist

BofAS Japan

deviation across beta quintiles, the gap had exceeded the peaks seen in 2003, 2013, and +81 3 6225 7754

2021 (Exhibit 1). At present, high-beta stocks, which include many AI-related names, and masashi.akutsu@bofa.com

return dispersion are tracking the average patterns observed in those years (Exhibit 2 Tetsuhiro Tokuyama >>

Strategist

and Exhibit 3). In this context, it would be surprising if the sharp selling pressure has not BofAS Japan

largely run its course. +81 3 6225 8499 tetsuhiro.tokuyama@bofa.com

After return dispersion peaks, trends do not usually collapse decisively, but their

momentum tends to fade. In 2003, 2013, and 2021, the three best-performing sectors,

measured over the 60 trading days before return dispersion peaked, began to rebound

from a stage comparable to the current one but failed to reclaim their previous highs

(Exhibit 4). Naturally, the current episode may not follow the same pattern. However, this

may suggest that selling into rallies could gradually intensify in the stocks that mainly

drove the market before the sharp decline. The margin balance ratio, which has risen to