What Israel’s Soaring Markets Are Saying About the Iran War
Israel’s stocks and currency are signaling confidence in the country’s position
Iranian ballistic missiles are raining down on Tel Aviv and Haifa. Israel’s main airport is shut. Much of the workforce is moving in and out of bomb shelters. For most countries, such a wartime scenario would send investors fleeing and markets tanking.
Yet the opposite is happening. Israeli markets are buoyant, outperforming the world. Israeli stocks, which trade Sunday through Thursday, have been posting solid gains. The TA-125 Index, also known as the Tel Aviv 125 Index, rose for five straight sessions as of the end of last week, even as global markets tread cautiously amid the specter of a prolonged Middle East war. It rallied again on Sunday after the U.S. strikes on Iran’s nuclear facilities.
What is going on?
Partly this can be explained by the familiarity of local investors with war. But markets are also signaling renewed confidence in Israel’s position and strategy—and Donald Trump’s decision to strike Iran’s nuclear sites has only strengthened that perception.
Much of Israel’s capital market is domestically held. After years of periodic conflict, local investors have learned that war rarely knocks the economy off course for long. For them, selloffs are often buying opportunities. Markets have tended to rebound quickly after recent conflicts, with initial drops followed by sustained recoveries.
Indeed, despite mass mobilization of reservists and fighting on several fronts, Israel’s economy has remained remarkably resilient since the Gaza war began nearly two years ago. The economy is still growing, and unemployment remains near multidecade lows of around 3%—though that figure partly reflects a recent shock to the labor supply after the departure of foreign workers and the revocation of work permits for many Palestinians. The budget deficit has widened from prewar levels, but overall the economy is holding up, says Rafael Gozlan, chief economist at IBI Investment House in Tel Aviv.
An investor who bought Israeli stocks on the eve of Oct. 7, 2023 would have fared better than one who picked the U.S. market. Between the surprise Hamas attacks that prompted the start of the Gaza war nearly two years ago and Israel’s strike on Iran on June 12, the TA-125’s total return including dividends was about 46%, compared with a 40% gain for the S&P 500, according to FactSet data.
But the latest rally suggests something more is afoot. Investors aren’t just buying the dip. The TA-125 is up about 8% since the Israel-Iran war began, compared with a small decline for the S&P 500. And it isn’t just equities: The shekel has strengthened against both the dollar and the euro, while government bonds are holding steady.
It appears investors are betting that Israel’s strikes on Iran will deal a crippling, if not decisive, blow to the regional axis linking Tehran to Hezbollah and its other proxies. A decision by the U.S. to strike three of its nuclear sites late Saturday, joining Israel’s attacks, risks further regional escalation. On Sunday, Iran fired a new barrage of missiles at Israel, with injuries and damage reported in major cities like Tel Aviv. Still, the TA-125 gained over 1%.
That might seem like a bold call. But Israel’s security landscape has shifted dramatically over the past 20 months. Before Oct. 7, it faced threats on several fronts: Hamas in Gaza, Hezbollah’s vast missile stockpile in Lebanon, potential for unrest in the West Bank, and Iranian use of Syria as a land corridor. Today, Hamas has been weakened, Hezbollah has been set back, the Assad regime has been replaced by an Iranian adversary, and Iran’s military and nuclear infrastructure has been badly damaged by surprise Israeli airstrikes and intelligence operations.
Investor optimism, Gozlan says, initially surged after Israel caught Hezbollah off guard in a surprise operation that culminated with the killing of its leader, Hassan Nasrallah, last year—and again after the recent strike on Iran. In short, Israel’s military actions have reduced what investors call its risk premium, or the amount that geopolitical risks are priced into its assets. That could pave the way for more foreign investment once the dust settles, Gozlan says.
Of course, it may prove too early to assess the extent of Israel’s achievements. What was initially expected to last one or two weeks might now stretch longer. On Friday, the Israeli military’s chief of staff, Eyal Zamir, warned that “difficult days still lie ahead” and that Israel must be prepared for a “prolonged campaign.”
And there is no clear endgame. Iran’s regime could survive—and if it does, it could decide to quietly rebuild its nuclear program or revive its support of proxy groups in the region. Perhaps even more consequential for Israel’s society and economy, the unresolved Palestinian conflict remains and is a source of much international opprobrium.
Experts will continue to debate the merits and consequences of the Israel-Iran war. But for now, Israeli markets are delivering a clear verdict: that Israel’s security posture is on the brink of lasting improvement.