Israel's Economy and Stock Market Show Remarkable Resilience Amidst War

Despite the profound trauma and heavy cost of the ongoing war, Israel's economy, particularly its financial markets, has demonstrated surprising vitality over the past three years. The country's GDP has grown by nearly 10%, and the Tel Aviv 35 stock index has surged by an impressive 130%, significantly outperforming major global indices like the S&P 500 and Nasdaq. This economic resilience, however, comes at a steep price, with the cumulative loss of GDP estimated by the Bank of Israel to reach approximately 177 billion shekels by the end of 2025. Experts suggest this unexpected strength stems from the Israeli economy's learned ability to recover from security shocks, a strong starting position with a favorable debt-to-GDP ratio, and the continued operation of the high-tech sector, which can function remotely and engage with global markets. The defense and cyber industries within high-tech have also received a boost from increased domestic demand and global defense spending.

Analysts point to several factors contributing to this phenomenon. The high-tech sector, a key growth engine, has maintained significant activity due to remote work capabilities and international operations. Defense and cyber industries have benefited from substantial government orders and increased European defense budgets following Russia's invasion of Ukraine. Yoni Fanning, Chief Strategist at Mizrahi Tefahot, highlights the significant contribution of service exports, which have grown by nearly 30% since before the war. Despite disruptions like school closures and missile attacks, service exports have shown resilience, with annual contractions occurring in only eight out of thirty-two months of data. The Chief Economist at Meitav, Chief Economist at Meitav, notes that the Tel Aviv 125 index has significantly outperformed the MSCI World index, suggesting that financial markets may be measuring shifts in expectations rather than current conditions, often rallying when fear is at its peak.

The Tel Aviv Stock Exchange has seen notable sector performances, with the insurance index jumping 490% and the banking index rising over 140% in the last three years. The defense sector, though recently launched, has also experienced sharp gains, with companies like Next Vision seeing a 965% increase. Major insurance companies and banks have also posted significant gains. The stock exchange itself has seen its share price soar, reflecting increased trading volumes. Conversely, the real estate sector has lagged behind, and only two companies in the Tel Aviv 35, ICL and Nice, have ended the period with negative returns.

The war has also led to unprecedented government bond issuances to fund defense expenses, increasing yields due to deficit expansion and risk premiums. However, the corporate bond market has shown resilience, attracting significant institutional investment and leading to a rapid narrowing of credit spreads. The shekel, initially weakening significantly after October 7th, has since strengthened considerably, trading around 3.08 shekels to the dollar, below its pre-war level. This recovery is attributed to the Bank of Israel's intervention, a shift in market perception of Israel's strategic standing, and structural factors like institutional investor activity and export inflows.