A research report on Japanese technology strategy by investment research firm Bernstein points out that despite the strong performance of Japanese technology stocks this year, valuation metrics have diverged significantly. The forward 12-month price-to-earnings ratio (P/E ratio) for the Japanese technology sector is only 16.5, 0.9 standard deviations below the 10-year average, representing a 12% premium over the broader Japanese market, lower than the historical average of 24%. However, the sector's price-to-sales ratio has risen to a record 2.7, with a 100% premium over the broader market, far exceeding the historical average of 58%.
Bernstein believes this divergence is related to the continued upward revision of earnings forecasts for technology companies. A strong upward revision cycle supports current P/E valuations, but analyst earnings expectations are already at extremely high levels, posing a risk that the upward revision cycle is nearing its peak. The report notes that earnings forecast revisions for the Japanese technology sector have strengthened significantly, both in absolute terms and relative to the broader market.
Bernstein warns that as earnings expectations rise to extreme levels, even if corporate profits continue to grow, technology stocks may face valuation pressure if the pace of analyst forecast revisions slows.
Therefore, the bank suggests paying more attention to sector rotation and focusing on technology companies with reasonable valuations and room for improvement in earnings prospects.
