TA-35 Soars 44% in 2025 as Israel's Markets Ride Post-Conflict Optimism

Israel's Financial Markets: A Shift from War to Peace

Israel's financial markets are experiencing a dramatic shift as the war in Gaza eases and signs of economic recovery emerge. The TA-35 Index has surged for six consecutive days, rebounding from the sharp selloff following the Hamas attack in October 2023. The index has now gained 101% from its post-attack low, adding $263 billion to shareholder wealth during the darkest phase of the conflict.

The shekel, Israel's currency, is nearing its strongest level since March 2022 and is on track for a fourth consecutive month of gains. Bond yields and credit-default swaps have also fallen, signaling a decline in perceived risk. Investors are increasingly viewing Israel as a stable market with strong growth potential.

Markets are transitioning from a wartime economic model to one driven by export growth and foreign investment. Expectations that the Bank of Israel may resume interest-rate cuts are boosting optimism about the country's economic trajectory. Analysts say the recent gains reflect investor confidence that Israel's economy can capitalize on a post-war boom, with a rebound in foreign direct investment and a surge in exports.

A Shift in Market Focus

The market rally is being fueled by a rotation away from defense stocks and into sectors with strong earnings and exposure to artificial intelligence. While defense contractor Elbit Systems was a major driver of gains during the conflict, it is now underperforming as investors pivot to growth-oriented themes. Companies like Teva Pharmaceutical Industries and Tower Semiconductor have led the charge, accounting for almost 40% of the benchmark's gains since the ceasefire was announced in late September.

This shift suggests that investors are no longer solely focused on Israel's military resilience. Instead, they are betting on a broader economic recovery. Elliot Hentov, chief macro policy strategist at State Street Global Advisors, noted that the war delayed inward foreign direct investment and outward exports. Now, with stability returning, investors expect both to rebound.

Global Appeal and Domestic Optimism

Israel's equity markets have outperformed most of their global peers in 2025, with the TA-35 up 44% so far this year-the best performance since 2009. The shekel's strength against the U.S. dollar has made Israeli assets more attractive to international investors, particularly in a global context where Wall Street has also seen gains. The bond market has shown a similar trend, with the risk premium on Israeli debt shrinking to less than 1 percentage point from 2 percentage points in August 2024. This indicates growing confidence in Israel's fiscal stability. Meanwhile, the iShares MSCI Israel ETF has drawn $194 million in net inflows over the past four quarters, the highest in its history.

Analysts are watching closely to see whether the current rally reflects the full potential of a post-war economy. Yaniv Pagot, head of trading for indexes and derivatives at the Tel Aviv Stock Exchange, said the market has not yet priced in the long-term benefits of a positive geopolitical scenario.

Outlook and Risks

Despite the optimism, political and military developments remain a key risk to the outlook. Israeli Prime Minister Benjamin Netanyahu has reiterated his stance against a Palestinian state, even as international pressure mounts for a credible path to Palestinian self-determination. The U.N. Security Council is set to vote on a U.S.-backed resolution that leaves the door open for Palestinian statehood.

Meanwhile, tensions in the West Bank remain high, with an increase in settler attacks and Israeli military operations in southern Lebanon. These events could disrupt the fragile peace and affect investor sentiment.

Still, the economic fundamentals suggest a strong recovery is underway. Israel is projected to grow at 4.3% in 2026, the fastest rate among developed countries. With global investors showing strong interest and the shekel gaining strength, Israel's markets may continue to defy the geopolitical headwinds and emerge as a key player in the post-war global economy.