Japanese stock market frontline observation: highly similar to 1999, investors may be forced to participate in a once-in-a-generation bull market

The Japanese stock market is experiencing a rally highly similar to the internet bubble, with buying interest heavily concentrated in AI and semiconductor sectors, and factor structures and index trends mirroring those of 1999.

According to Wind Trading Platform, a report released by Morgan Stanley MUFG Securities on May 14th indicates that among all historical periods since 1990, the most similar market environment to April 2026 is the internet bubble period. Value factors underperform, momentum factors significantly outperform, and low volatility and small-cap factors weaken—these three major features present a rare mirror image between the two periods.

Meanwhile, the Nasdaq 100 Index and the Philadelphia Semiconductor Index (SOX) have both entered steep upward channels since April 2026, closely resembling the trend during the tail end of the internet bubble from late 1999 to early 2000.

The report directly points out the strategic implications for investors: due to the recent sharp rise in stock prices, investors have “no choice” but to follow the trend and participate in this AI- and semiconductor-driven rally. The report also warns that some individual stocks are showing clear signs of valuation bubbles, advising investors to follow the trend while remaining alert to potential reversals. Using the roughly six-month duration of the internet bubble’s late stage (October 1999 to March 2000) as a reference, the next six months may be a critical time window to watch.

Factor structure highly consistent, quantitative indicators point to 1999

Morgan Stanley’s team used Mahalanobis distance to measure the similarity of factor returns across months since 1990, using 13 factor categories as dimensions. The conclusion clearly points to the internet bubble period.

Specifically, the months with the lowest Mahalanobis distance—most similar to April 2026 market conditions—are concentrated between June 1999 and February 2000. Using 8.0 as the threshold for the bottom decile in historical data, five months within this range have readings below this threshold. In contrast, the most recent similar periods are October 2025 and January 2026, consistent with the market logic of AI and semiconductor themes extending from 2025 to the present.

Looking at individual factors, the common features of the two periods are clearly visible: value factors (including 12-month forward earnings yield, book-to-market ratio, dividend yield) underperform; momentum factors (12×1M momentum, EPS upgrades/downgrades) significantly outperform; low volatility and small-cap factors both weaken. Due to differences in definitions, quality factors show some divergence between the two periods, making them one of the few exceptions.

Market concentration hits record highs, buying interest narrows sharply toward high-beta targets

Beyond factor similarities, the structural features of the current Japanese stock market are equally noteworthy.

The Nikkei 225 to TOPIX ratio first broke above 16x on April 24, 2026, setting a new record high. The continued rise of this ratio reflects extreme concentration of buying interest in a few large-cap, high-beta stocks—these stocks have a much higher weight in Nikkei 225 components than in TOPIX.

Momentum signals also show extreme readings. The 20-day rolling return of the 12×1M price momentum factor reached 14% on April 28, a ten-year high. Meanwhile, Morgan Stanley’s previous “Beta Polarization” report indicates that high-momentum stocks have significantly higher beta values, while other groups’ betas have sharply fallen below 1. In other words, market buying interest is almost entirely concentrated in high-beta stocks, leaving others heavily neglected.

Index valuations are not overheated yet, but signs of bubble formation are evident at the individual stock level

On valuation, there is a clear divergence between the current market and the internet bubble period, which is one of the most significant differences.

As of May 10, the forward P/E ratios of the Nasdaq 100 and SOX are 24.9x and 21.5x respectively, in a range that is “not low but not excessively high,” contrasting with the rapid valuation surges during the internet bubble. This data suggests that the upside potential at the index level has not yet been exhausted.

However, at the individual stock level, a very different picture emerges. Morgan Stanley’s research team’s “AI Enablers” basket shows that the median and mean forward P/E ratios of constituent stocks are continuously rising and are now significantly higher than in 2025. This indicates valuation pressures are increasingly concentrated in smaller-cap, more industry-specific stocks, raising the risk of crowded trades.

The report emphasizes that this valuation divergence is a key variable for judging the future trend—while index valuations still have room, the degree of crowding at the stock level warrants caution.

Morgan Stanley: Investors are forced to participate but must also manage reversal risks

Based on the above analysis, Morgan Stanley’s quantitative team offers clear scenario judgments and strategic advice.

The report believes that, given the many similarities between the current market and the internet bubble, the current rally is quite likely to follow the same path as the bubble period. Morgan Stanley’s Chief Global Economist Seth Carpenter characterizes the current stage of AI development as the sixth major wave of innovation since the Industrial Revolution, comparable to the IT revolution of the late 1990s, providing macro-level support for this structural analogy.

From a strategic perspective, the report directly states: the recent steep rise in stock prices has essentially “left investors with no choice” but to participate. If the current market indeed unfolds as the largest bull market since the internet bubble, this would be a “once-in-a-quarter-century” opportunity, forcing investors to go with the flow.

At the same time, the report reminds that a prudent strategy is to “participate in the trend while remaining aware of potential reversals.” The tail end of the internet bubble lasted about six months, so the report considers the next six months as a key window to monitor whether the market is approaching a potential turning point.

All this insightful content is from Wind Trading Platform.

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