Investing.com -- Japan’s stock market has climbed to new highs on renewed foreign buying, but investors should be cautious heading into earnings season, according to analyst at UBS.

The TOPIX index broke above 2,800 last week, helped by momentum-driven gains and concerns among global investors about missing out.

But UBS said the rally may not last, pointing to stretched valuations and weakening profit forecasts.

“We remain Neutral on Japanese equities as momentum-driven markets can reverse quickly,” UBS analyst Chisa Kobayashi said.

Japanese shares have underperformed global peers this year, but the recent rebound has been led by sectors less exposed to trade tensions, such as tech services and utilities.

Many of these stocks are now expensive, UBS said.

The upcoming June-quarter earnings, due later this month, could mark a turning point.

“We expect that downward revisions of full-year guidance will be announced with 1Q results, marking the end of negative news”

Exporters should cut full-year guidance, with chance of ending months of downgrades and setting a floor for expectations.

That could open the door for a recovery in cyclical shares like autos and machinery, which have lagged.

“While these stocks may continue to outperform if the momentum market persists, from a risk-reward perspective, we believe undervalued, high-quality cyclical stocks offer better medium-term returns,” Kobayashi said.

With near-term gains seen possible, strong U.S. markets and share buybacks by Japanese companies may provide some support if sentiment shifts.

UBS remains cautious overall but sees selective opportunities in undervalued companies, especially as corporate buybacks and resilient U.S. markets may limit the downside.