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Are the markets and in particular the Nikkei Index reaching levels that are too high?

Sometimes coincidences speak louder than any words to describe an extraordinary situation. In the very days when Japan enters recession and slips to fourth among the world's economies, the Tokyo Stock Exchange reaches new all-time highs with a long rise in the past 12 months. 

The Nikkei, Japan's list index rose 43 percent

The Nikkei, Japan's list index, is up 43 percent, including 17 percent in 2024 alone. This strong rally is due to several reasons, but two are the most important: the weakness of the yen against the dollar, which has lost 6.4% since the beginning of the year and 12.9% since 2023.

The Tokyo Stock Exchange is considered a gold mine for Japanese exporting companies. With the weak yen, these companies enjoy higher revenues and profits. In fact, 48 percent of the profits of companies listed in the Nikkei index come from abroad. This has a potential positive impact on their accounts. Paradoxically, the weakness of the Japanese economy offers another potential advantage: by delaying the Bank of Japan's first monetary tightening, negative rates still remain in place, giving Japanese companies more time to adjust to any changes in the market.

There are several factors that have pushed up Wall Street. One of the main ones is the steady growth of the U.S. economy, which continues to surprise positively. In addition, corporate profits are on the rise, with the quarterly earnings season now in its final phase. According to Bloomberg data, Wall Street earnings were up 7 percent year-over-year and revenues were up 4 percent. Seventy-six percent of companies exceeded analysts' expectations with a 7% increase in earnings and an average of 7%. But it is mainly the Nasdaq that is driving Wall Street, thanks to the performance of seven major technology companies.

There are many reasons for the rise in European stock markets, including bank profits favored by interest rates. 

The risks in global financial markets are multiple

High rates that favored the Milan stock market in particular. In summary, several reasons that coalesce into a bullish trend common to all stock markets around the world.

The risks in global financial markets are multiple. In America, the regional bank crisis and rising insolvent debts are causing concern. In Japan, monetary policy is going through a delicate period of normalization. With government debt amounting to 250 percent of GDP, held entirely within the country, a rise in interest rates would mean losses for investors who own a large amount of government bonds. But what is most thought-provoking are multiples, or the ratio of stock prices to other corporate assets. In Tokyo and Wall Street, we are at the highest levels since at least 2010, with P/E values above 20.

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Past performance is not indicative of any future results. This information is provided for informational purposes only and should not be construed as investment advice.