Three Years of War: How the Israeli Economy and Financial Markets Surged
Three years after October 7, Israel's economy and financial markets have shown unexpected resilience, with the Tel Aviv 125 index surging 120% and the shekel strengthening significantly.
Three years of war have left deep scars on the State of Israel and its citizens—a trauma whose effects will linger for years to come. Yet, in at least one domain, Israel has demonstrated remarkable resilience: the economy, and particularly the financial markets. Israel's Gross Domestic Product (GDP) grew by nearly 10% during this period, while the flagship Tel Aviv 35 index surged by no less than 130%. The Tel Aviv 125 index, which includes the 125 stocks in the Tel Aviv 35 and Tel Aviv 90 indices, jumped by 120%. These are impressive gains in their own right, and even when compared to the largest stock market in the world: since the eve of October 7, the S&P 500 index has recorded a gain of about 80%—some 40 percentage points less than the Tel Aviv 125. The Nasdaq index surged by about 101% over the same period—some 19 percentage points less.
The Cost of War and Economic Resilience
An important caveat: this does not mean the war has not harmed the local economy. Its cost has been very heavy. According to Bank of Israel estimates, the cumulative loss of GDP from the beginning of the war to the end of 2025, compared to the pre-war growth trend, amounted to about 177 billion shekels—an amount equivalent to 8.4% of annual output. Still, the economy's ability to grow and the stock market to surge during a protracted war is worthy of examination. Some countries grew rapidly during and after wartime, including the US during World War II and the Korean War, but in those cases, the bulk of the fighting took place far from their territory.
The high-tech sector, one of Israel's central growth engines, has been able to continue a significant portion of its activity even under wartime conditions, thanks in part to remote work capabilities and operations in global markets. The war that began with the October 7 massacre was fought on several fronts, but it also directly hit Israel's territory and home front. Despite this, the Israeli economy demonstrated endurance, and the financial markets recorded sharp gains. How did it achieve this? A good question. There appear to be a series of reasons, though it is doubtful whether any single one of them would have sufficed.
The Stock Market Rally and Sector Performance
The Tel Aviv Stock Exchange pushed forward despite not being heavily weighted toward technology. While many high-tech companies are traded, their weight in the leading indices is not particularly high: most local high-tech firms are private, and the largest of those that are public trade mostly overseas. Among the sectoral indices, Tel Aviv Insurance stood out above all, jumping by 490% over the past three years. This increase was recorded against the backdrop of the high interest rate environment and consistent improvement in financial reports, a combination that attracted extensive investments from foreign investors. The Tel Aviv Banks index also outperformed the Tel Aviv 125, surging by more than 140%.
Government Debt and Bond Yields
The war since October 2023 has triggered an unprecedented wave of government bond issuances to finance security expenditures, which raised yields to maturity against the backdrop of an expanding deficit and rising risk premium. Concurrently, the corporate debt market demonstrated resilience and exhibited record demand from institutional entities, leading to a rapid narrowing of credit spreads. The immediate economic need to fund combat costs, the rehabilitation of communities, and reserve duty payments forced the Ministry of Finance to massively increase the scope of government bond issuances.
The Strength of the Shekel
The foreign exchange market tells a story that would have been difficult to imagine in the opening days of the war, when the dollar surged past 4 shekels and the Bank of Israel launched an unprecedented move, announcing it would sell tens of billions of dollars to stabilize the market. Three years later, not only have most of the dollars remained in the central bank's foreign exchange reserve pool, but the dollar trades around 3.08 shekels—nearly 20% below its pre-war level. On the eve of the war, the dollar traded at 3.8388 shekels, following a significant depreciation recorded by the shekel throughout 2023 amid political uncertainty.
