Investors sour on Israel as US moves to end fighting, blunting market’s wartime gains

For months, barrages of Iranian ballistic missiles flying at Israel, escalating tension at the Lebanese front and fears of a widening conflict did little to derail investor confidence in the Israeli financial market, pushing local stock indices to record highs.

That changed last week.

Around the globe, equity markets rallied while oil prices tumbled, fueled by optimism that a new US-Iran deal would end the war and reopen the crucial Strait of Hormuz to commercial traffic, taking pressure off energy supplies and reducing economic and geopolitical uncertainty.

But in Israel, which launched the war with the US on February 28, local markets had the opposite reaction, falling sharply amid a mass sell-off. The gap between the underperformance of the local stock market and the US market was the widest since March 2025, according to IBI Investment House.

“When rockets were flying in the heat of things, the local stock market was overly optimistic that the geopolitical risk in the long term would be lower, meaning the risk from Iran, and from Hezbollah in the north,” Leader Capital Markets chief economist Jonathan Katz told The Times of Israel. “There is disappointment in the market that the emerging new deal hasn’t shifted the paradigm at all, and there is concern that Iran is now rebuilding and will get money from the reopening of the Hormuz, which means possible further conflicts down the road, and a renewal of the nuclear threat.”

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“Certainly, the ballistic missile threat never went away,” Katz said.

The emerging US-Iran deal is sending fears down the local market that the cards are flipping, with Tehran winning influence over both Washington and the regional agenda, after two and a half years of Israel steadily weakening Iran and its proxies.

Israeli officials are bitterly opposed to the deal’s terms, which they criticize for resolving none of the war’s key goals — notably, eliminating Iran’s nuclear and ballistic missile programs, and creating the conditions for the fall of the regime.

The memorandum of understanding between the US and Iran also constrains Israeli action against Hezbollah in Lebanon, a fiat that Jerusalem has vowed to defy.

To many in Israel, the rhetoric coming out of Washington, Israel’s most important long-time ally, has been strikingly unsympathetic to the country’s concerns, placing them below a desire to get the global economy back on track.

“There is a sentiment that Israel’s hands are tied amid pressure from the US and a slight falling out of a relationship with President Trump, our strongest ally, so this realization that the war didn’t change Israel’s long-term geopolitical risk element is what causes a partial reversal, because the Israeli stock is still up year to date rather nicely,” Katz remarked.

The Tel Aviv Stock Exchange’s TA-125 index dropped 4.9% last week and is down almost 8% so far this month. The benchmark index is still up 11.4% from the start of the year, a rise that was driven by optimism for an end to hostilities in the region and an improved geopolitical environment.

The TA-35 index of blue-chip companies slipped 4.6% last week, trimming its gain since the start of the year to 14%. The TA-90 index, which tracks the shares with the highest capitalization not included in the TA-35 index, fell 5.9% and is up a mere 1.9% this year. On Monday, the TA-35 declined 0.4%, and the TA-90 sank 2%.

“The overconfidence during the war was exaggerated, and what looks to be the gloom and doom of the past week seems also to be exaggerated,” Katz said.

During the same period, in the US, the S&P 500 index rose 0.9%, and the Nasdaq composite jumped 2.4%.

“This is a wake-up call that the geopolitical reality is less optimistic,” said IBI Investment House chief economist Rafi Gozlan. “The positive momentum in the local market has deflated.”

Despite being embroiled in the longest and most intense fighting period in its history, Israel’s main stock indexes have broken through multiple record highs over the last two years, quickly recovering from an initial steep plunge at the outbreak of war with the Hamas terror group in October 2023.

In 2024, which saw intense fighting in Gaza and Lebanon, as well as the first-ever direct Iranian attack on Israel, the TASE was the world’s fastest-rising stock market.

Until this week, stocks had continued to soar as investors placed big bets that Israel’s US-backed military achievements against Iran’s nuclear program — alongside the already weakened Iranian proxies in Lebanon, Syria, and Gaza — would be a game-changer and reduce risks to Israel’s security and economy.

For decades, the Iranian threat was a cloud looming over Israel’s economic horizon, cited as a major geopolitical threat by local and global investor reports, international credit rating agencies, and country forecasts.

Gozlan said the US-Israel war with Iran and fighting on multiple fronts had also stirred investor hopes for a reshaped Middle East and potentially a new era of economic peace and prosperity in the region, opening the door to long-sought opportunities with Israel’s neighbors.

“The local market priced in overly optimistic scenarios, and although generally, markets are forward-looking, here, there was a late market response to the realistic developments on the ground,” said Gozlan.

The prospect of an improved regional security landscape alongside Israel’s military successes also buoyed investor optimism to buy the shekel.

The local currency, which recently reached a 33-year peak against the dollar, weakened by about 0.75% last week. Since the start of June, the shekel has lost 5.2% of its value against the dollar, but it was still up 7.3% so far this year, as of Friday.

“After overexuberance and now what seems to be overpessimism, there are a lot of ifs when looking ahead,” said Katz. “If current deal negotiations advance and the US-Iran agreement holds, and if in Lebanon there is total quiet, and globally it is calmer if the Strait of Hormuz remains open, the markets have room to correct as they were fluctuating in both directions.”