Israeli Investors Erase Expectations for Further Interest Rate Cuts This Year

Matan Shitrit, Chief Economist at The Phoenix, expresses optimism about the US stock market, citing continued economic growth, rising corporate profits, and reasonable valuation multiples in the tech sector, despite high US Treasury yields and Federal Reserve rate hikes. He notes that while major US indices are hitting record highs, some market segments have weakened. Shitrit is more cautious about the Israeli market, stating that while valuations have become more reasonable since March, they remain above historical averages. He identifies potential opportunities in sectors like real estate, construction, and telecommunications, which have been affected by high interest rates, and even in defense stocks, though the market as a whole is still considered relatively expensive.

Shitrit explains that technology stocks, particularly those involved in AI, are sustaining the US market due to their lower sensitivity to interest rates and strong profit growth. He argues that rising yields are not necessarily bad news for stocks if they stem from rapid economic growth, which supports corporate earnings. However, he acknowledges that other factors, including the US fiscal deficit, high oil prices, inflation concerns, and the market's expectation of prolonged high interest rates, also contribute to yield increases. He also points to increased debt issuance by tech giants like Google, Microsoft, and Amazon to fund investments, which competes with US government debt issuance.

Regarding Israel, Shitrit believes the Bank of Israel's research department's forecast for another interest rate cut is no longer relevant due to changing economic conditions, including higher energy prices. He suggests that current market pricing, reflected in forward rates, indicates investors have largely dismissed the possibility of further rate cuts within the next year and are even considering a potential rate hike. Shitrit anticipates that inflation in Israel, which has moderated significantly partly due to a strong shekel, may have hit its lowest point, with risks tilted upwards due to rising global commodity prices and other factors. He also discusses the impact of institutional investors' hedging activities on the shekel's strength and the relative attractiveness of Israeli versus international debt markets, advising investors to consider overseas opportunities.

Shitrit expresses concern about the Israeli housing market, noting that even anticipated interest rate cuts have not stimulated demand, which he expects to remain weak for the next one to two years. He is particularly worried about the supply side in the future, as developers are slowing down construction starts despite high building permits, potentially leading to supply shortages in four to five years. This trend, combined with higher mortgage payments compared to average rental costs, is pushing more people towards the rental market. He sees the banking sector as stable, with reasonable valuations after recent declines, but not offering exceptional opportunities.