Israeli Markets Navigate Global Trends and Upcoming Elections

The Israeli stock market is returning to full activity after a shortened trading week due to the Sukkot holiday. The primary focus for traders is shifting from recent performance to future pricing, particularly in light of global economic shifts and domestic political developments.

In the United States, rising bond yields, exceeding 5% for long-term bonds, are presenting a challenge to the stock market. Despite this, US equities remain near record highs, largely attributed to investor optimism about future corporate earnings, especially driven by the potential of artificial intelligence to boost growth and productivity. However, the market's current high valuations necessitate stronger-than-expected results to justify these levels, raising questions about how much AI-driven growth is already priced in.

Domestically, Israel is approaching a significant event: general elections. While predicting the outcome is uncertain, the market will undoubtedly need to price in the economic implications of the results. This includes potential shifts in defense spending, deficits, taxation, regulation, foreign investment, and international relations. Bank of Israel has noted that geopolitical and fiscal uncertainty impacts risk premiums, exchange rates, and inflation, suggesting that election outcomes can influence economic expectations and subsequently affect the stock market, bonds, and currency.

Recent performance in the Israeli market has been volatile, with rapid shifts in investor sentiment. Green energy stocks, which experienced significant hype and reached what some considered overly optimistic valuations, have recently seen sharp declines. This serves as a reminder that even fundamentally sound companies can fall if expectations embedded in their stock prices are too high, especially in a rising interest rate environment where financing costs increase.

Regarding the elections' impact on the stock exchange, precise numerical forecasts are difficult. The market is influenced by a multitude of factors including interest rates, corporate profits, security situations, exchange rates, international markets, and Israel's risk premium. However, an election outcome perceived to increase uncertainty or risk premiums could lead investors to demand higher returns, potentially weakening the shekel and increasing financing costs. Conversely, a result seen as stable, with sound economic policy and reduced uncertainty, could attract foreign investors, strengthen the shekel, and boost asset prices. The market's reaction can also become a self-fulfilling prophecy, as investor actions based on anticipated outcomes can influence market dynamics even before concrete economic data changes.

Ultimately, once the political noise subsides, the market will revert to fundamental questions about interest rates, the shekel, deficits, defense spending, foreign investment, and corporate profits. The author believes that an outcome reducing uncertainty and improving investor confidence would be highly beneficial for the local market, but cautions against setting specific numerical targets. The market will focus more on the economic consequences of the election results than on who wins.