Goldman Sachs lowers Japan stock target prices: Halmerz outage may last 6 weeks, Japanese companies' profits face oil price "pressure"

Ask AI · How Does the Prolonged Hormuz Strait Disruption Affect Japan’s Earnings Forecasts?

Goldman Sachs has lowered its three-, six-, and twelve-month target prices for the Japan Tokyo Stock Exchange (TOPIX) index to 3800, 4000, and 4200 points respectively, citing that the ongoing Middle East conflict continues to push up energy prices, which will substantially compress the earnings of Japanese companies. This adjustment indicates that market expectations for a quick resolution of the Middle East situation have significantly cooled.

According to the follow-the-market trading desk, Goldman Sachs published a research report on March 29, and its commodities analysts raised their forecasts for oil and natural gas prices. The baseline assumption is that the disruption of oil flow through the Strait of Hormuz will persist for six weeks, combined with the impact of increased strategic reserves.

Based on this, the firm also updated its macroeconomic outlook for the Asian region. The Japan equity strategy team then promptly lowered the target prices for various horizons by 100 points from the previous 3900/4100/4300 levels.

On the earnings front, the forecast for FY26 (fiscal year ending March 2026) earnings per share (EPS) growth was sharply revised downward from 12.3% to 7.2%. The main reason is that higher oil prices are squeezing corporate profit margins. This forecast is about 5 percentage points below the market consensus of 12%, indicating a significant divergence.

Meanwhile, market sentiment remains fragile. During the week of March 16 to 19, both foreign and domestic institutional investors turned to net selling, while only retail investors bought against the trend, absorbing the net outflows.

Hormuz Impact: Earnings Gap Widening from Three to Six Weeks

The core driver of this downgrade is an upward revision of the baseline scenario—extending the duration of the oil flow disruption through the Strait of Hormuz from three weeks to six weeks.

Under both scenarios, the impact on Japanese corporate earnings differs markedly. In the three-week disruption scenario, FY26 EPS growth is forecast at 8.8%, with profit margins contracting by 0.3 percentage points compared to pre-conflict levels. The contribution to profit growth from energy and trading companies is approximately 0.7 percentage points.

In the six-week disruption baseline scenario, FY26 EPS growth further declines to 7.2%, with profit margins contracting by 0.5 percentage points. Although the positive contribution from energy and trading companies increases to 1.2 percentage points, it is still insufficient to offset the overall pressure. The GDP drag in both scenarios is about 0.6 percentage points.

The research report notes that the market consensus for FY26 profit growth is 12%, while the firm’s top-down forecast is only 7.2%. The gap of about 5 percentage points suggests that the potential downside risk to earnings has not yet been fully priced into the market.

Insurance Leads the Rally, Defensive Sectors Drive Rotation

Over the past week, Japan’s stock market experienced a slight rebound overall. The TOPIX rose 1.1% for the week, while the Nikkei 225 remained roughly flat. However, the internal sector structure showed clear divergence, with defensive sectors and energy-related sectors significantly outperforming the broader market.

The insurance sector led with a weekly gain of 9%, mainly driven by news that Berkshire Hathaway took a stake in Tokio Marine Holdings, which surged as much as 25% during the week.

Defensive sectors such as pharmaceuticals (+5%) and healthcare (+5%) also performed strongly. Energy, oil, coal, and trading companies benefited from expectations of higher oil prices, achieving gains to varying degrees.

The worst performers included other products (-3.5%) and real estate (-3.2%). The construction sector declined 4% over the week, the largest drop among all sectors, and is currently categorized as a reduce-hold (sell) sector.

Domestic Demand Stocks Start to Outperform, Breaking the “Weak Yen Benefits Exporters” Logic

Despite the continued appreciation of the USD/JPY exchange rate, the report observed a structural change worth noting: since the outbreak of the U.S.-Iran conflict, domestically oriented stocks have begun to outperform those with higher international exposure on a relative basis.

This phenomenon breaks the traditional logic that “a weaker yen benefits exporters.” Against the backdrop of persistent global uncertainty, investors are evidently more inclined to reduce external risk exposure and instead allocate capital to companies whose revenue sources are primarily domestic.

Meanwhile, fund flow data shows that market sentiment remains cautious. According to the latest data from the Tokyo Stock Exchange (TSE), during the week of March 16 to 19, foreign investors net sold 4910 billion yen of TOPIX Prime market stocks, domestic institutions net sold 2600 billion yen, and only individual investors bought in net, totaling 3090 billion yen against the trend.

Global Stock Forecast Comparison: Japan’s Upside Potential is Moderate

Within Goldman Sachs’ global stock forecast framework, even after this downward revision, the target price for the TOPIX still implies some upside potential. The estimated gains over three, six, and twelve months are approximately 4%, 10%, and 15%, respectively.

In comparison, the report’s twelve-month target for the S&P 500 is 7600 points, representing about 17% upside; MSCI Asia Pacific (excluding Japan) has a twelve-month target of 870 points, also with 17% upside. Europe’s Stoxx 600’s expected return is more moderate, with a twelve-month target implying about an 8% increase.

Regarding sector allocation, the report recommends overweight positions in machinery, IT and services, banks, electrical appliances and precision instruments, construction and materials, non-bank financials, raw materials and chemicals, and commercial and wholesale sectors; and underweight positions in power and gas, food, pharmaceuticals, transportation and logistics, steel and non-ferrous metals, automobiles and auto parts, energy resources, and real estate.