Market Insights June 1st, 2026

Japan: inflation that masks the underlying reality

Japan’s core inflation rate for April came in at 1.4% YoY, its lowest level in four years and below market expectations (1.7%). However, this figure is somewhat misleading, as government fuel subsidies artificially suppressed price growth.

Other indicators point to genuine underlying inflationary pressures. National spring wage negotiations resulted in pay increases exceeding 5%, while residential property prices in Tokyo rose by nearly 16% YoY.

Consequently, this temporary moderation in inflation is unlikely to hinder the Bank of Japan’s (BoJ) restrictive monetary stance. The central bank has, in fact, raised its inflation forecast for 2026 to 2.8%, up from 1.9% previously. Financial markets are currently pricing in a 25 basis-point interest rate increase on June 16, which would bring the policy rate to 1.0%.

Beware of excessive optimism in certain segments of the US market 

US equity markets continue to reach new record highs. In May alone, the S&P 500 closed at an all-time high on eleven separate occasions, highlighting the exceptional momentum behind US stocks. This has occurred despite a tense geopolitical backdrop that could have been expected to generate far greater volatility than has actually materialized.

This rally is largely supported by solid fundamentals, as confirmed by the latest corporate earnings releases. For the first quarter of 2026, earnings growth among the 500 largest US companies reached 27%, significantly exceeding analysts’ expectations. Over the next three quarters, earnings are also expected to grow at close to 20%, with forecasts continuing to be revised upward.

As a result of this earnings surge, US equities are now considerably less expensive than they were before the outbreak of the conflict in the Middle East in early March. While the S&P 500 ended May approximately 10% higher than at the end of February, the index’s price-to-earnings ratio (P/E), a common valuation measure, stands at 21x, compared with nearly 22x three months ago.

Why, then, should investors be concerned in such a favourable environment for risk assets?

Our primary concern stems from the fact that an increasingly small number of stocks are driving overall market performance. Since the beginning of the year, the S&P 500 has gained 10.7%, of which 8% have come from the technology sector alone. In May, the picture was even more striking, with virtually the entire market performance attributable to technology stocks.

The enthusiasm surrounding technology and the Artificial Intelligence theme is understandable given the transformative impact AI is having on the economy, offering the prospect of significant productivity gains and enhanced profitability for companies capable of integrating these tools into their business models. However, the recent appreciation of AI-related sectors has been excessively rapid. While we fully acknowledge the long-term potential of AI and the companies exposed to this theme, we are increasingly concerned about the risk of a short-term correction, as the current pace of gains appears unsustainable.

Various sentiment indicators are conveying the same message. Markets appear overbought, investor complacency is rising, and the parabolic nature of recent price movements suggests that valuations have diverged too far from their long-term growth trends.

Our near-term caution is focused primarily on the semiconductor segment, which has gained 80% YtD. Some under-invested market participants continue to chase these stocks, further fuelling the upward momentum.

We therefore believe that profit-taking is warranted in the short term, particularly within semiconductor stocks. We currently favour sectors that have lagged behind, such as financials and healthcare, while awaiting a healthy consolidation in technology. Such a correction is likely to be relatively brief. It would then provide an opportunity to rebuild exposure to a sector that remains essential and now represents more than 40% of the US equity market.

This week’s figure: -0.1%

French GDP contracted by 0.1% in the first quarter (+0.9% YoY), reflecting downward revisions to both household consumption and investment. This development confirms the fragility of France’s economic momentum.