What to watch in the week ahead

• With Japan’s TOPIX index up around 20% since September, investors will be asking whether the rally can continue. Strong and stable leadership has historically provided a powerful tailwind for Japanese assets. Earnings momentum is also positive, with profit growth likely to accelerate in the 2026 fiscal year, in our view.
• Another key question for investors this week will be whether the AI narrative will shift back to being a net positive for markets. While we are now Neutral on the US tech sector overall, we continue to view AI as a powerful driver for equity markets as more industries adopt the new technology.
• Recent US economic data have shown signs of labor market resilience and moderating inflation, reducing the urgency for further rate cuts from the Federal Reserve. This week, investors will be hoping for guidance on how the latest releases are being viewed by top Fed officials, several of whom are scheduled to speak.

Can Japan’s post-election rally go further?

Japanese equities captured the global limelight last week. The Nikkei rallied 5% and the TOPIX 3.2% after election results made it clear that Japan’s pro-growth Prime Minister Sanae Takaichi had won a historic super majority in the lower house, claiming almost 70% of the seats in parliament. This was the largest majority since 1945 and will enable the prime minister to overcome any objections to her expansionary agenda either from rival parties or the upper house. That agenda includes ramping up spending on defense and strategic industries and cutting the sales tax on food for two years. With four years left until the next general election, she also has time to push through bolder corporate governance reforms, with a range of measures that could make Japanese assets more attractive to international investors.

But with the TOPIX up around 20% since September, investors will be asking whether the rally can go further. We believe it can. Strong and stable leadership has historically provided a powerful tailwind for Japanese assets. In the 100 days after major ruling party wins—including Koizumi in 2005, and Abe in 2012 and 2014—the TOPIX averaged gains close to 20%. There are other potential positives, in our view. Earnings momentum is strong, and the shift toward “good” inflation as real wages recover is a significant positive development, in our view. We expect profit growth to accelerate from 4% in the 2025 fiscal year to 10% in 2026.

So, we keep our Attractive rating on Japanese equities and see scope for further gains, especially in sectors benefiting from domestic policy (defense, banks, real estate, IT services) and global themes (power, data centers, automation, select autos).

Will the market headwind from AI abate?

AI has recently moved from being the most important boost to market sentiment to being a central cause of uncertainty. This shift kicked off in earnest several weeks ago after an upgrade to Anthropic’s coding tools raised fears of rising competition for incumbent software firms. After further pressure last week, the S&P 500 software index is down 19.5% so far this year. The pace of AI capital spending by hyperscalers, and the degree to which this is now being financed by borrowing, has also been adding to market angst. Last week, the prospect of encroachment by AIpowered upstarts took a toll on a wider range of industries, from insurance brokers and real estate services firms to the logistics sector.

A key question for investors this week will be whether the narrative will shift back to being a net positive for markets. While we are now Neutral on the US tech sector overall, we continue to view AI as a powerful driver for equity markets as more industries adopt the new technology. We also advise investors to broaden their horizon beyond the US in seeking gains from AI. Taiwan and South Korea lead in chip and memory manufacturing, and recent earnings and management comments continue to point to strong and growing demand. Japan, meanwhile, offers opportunities both in the supply chain and in robotics and automation. We also see value in European companies that command leadership in the semiconductor and payment sectors. Finally, in China, leading internet companies have demonstrated their ability to integrate AI into profitable business models.

So, with AI acting both as a driver and a detractor of performance, investors should hold a diversified exposure as they dynamically evaluate the AI landscape.

Will Fed officials hint at a longer rate cut pause after strong jobs data?

The US economy appears to have started 2026 with good momentum. This was illustrated most clearly last week in the January jobs data. Employment increased by 130,000, almost double the consensus forecast. Encouragingly, private sector payrolls were even stronger, growing by 172,000. That compares to an average pace of job creation of just 15,000 a month last year, down from an initially reported 49,000. Stronger demand for workers pushed down the jobless rate to 4.3%; a figure that economists had expected to hold steady at 4.4%. This supported the view expressed by top Fed officials at the last policy meeting that the labor market appears to be stabilizing after a period of deterioration. This should make it easier for the Fed to take a break from rate cuts in coming months.

But last week’s US inflation data were also relatively tame. Annual inflation came in at 2.4% for the headline and 2.5% excluding volatile food and energy—the slowest annual inflation rate since the cost-of-living surge got underway in early 2021. This week investors will be hoping for guidance on how these data are being viewed by top Fed officials, with several scheduled to speak this week, including voting member Neel Kashkari. We also get the minutes of the January policy meeting, along with the personal consumption expenditures index for December, the central bank’s favorite measure of inflation.

We believe that last week’s developments will support our view that the Fed is in no rush to cut rates again given healthier labor market data. But as confidence builds toward the middle of the year that price pressures arising from tariffs are contained, we expect further easing. Our base case is for two 25-basis-point cuts in 2026, further eroding returns on cash and providing a positive backdrop for high grade government and corporate bonds.