Ahead of the market opening: Why Elbit fell and the critical figure to be released today
Yesterday's reports led to a red close for the stock exchange: Elbit plummeted despite a strong report, while banks surged following the Hapoalim results. Today, the market focuses on the US Consumer Price Index, which will dictate the direction of interest rates.
The trading day opens amid a volatile reporting season and ahead of the week's main macro event—the US Consumer Price Index, to be published today.
The standout story yesterday was Elbit Systems, which plummeted 9.4% on a massive turnover of approximately 340 million shekels, despite reporting growth in both revenue and profit. The answer lies in valuation: Elbit trades at a forward P/E ratio exceeding 40. For a defense company, this is an exceptionally high and stretched metric, requiring dream results quarter after quarter to justify the premium.
When the report was merely "good," investors—some already sitting on significant gains—seized the opportunity to take profits. This is a hallmark of the current season: when expectations are sky-high, even a positive report can trigger a sell-off, a phenomenon recently seen with giants like Google and defense firms like Next Vision.
In an interview with ice, Elbit CEO Bezhalel Machlis focused on the business fundamentals, highlighting the company's record backlog, growing global demand for defense systems, and its strong positioning for long-term growth.
The broader market picture was mixed, with the TA-35 climbing 0.1% and the TA-125 retreating 0.2%. Defense stocks fell 4%, led by Elbit, while Torpaz plunged 14.8% due to a weakened EBITDA margin. Conversely, the banking sector shone: the index jumped 2.5%, with Mizrahi Tefahot rising 3.2% and Hapoalim gaining 2.7%.
In New York, the trend was slightly negative, weighed down by rising oil prices (Brent above $87) and concerns surrounding Nvidia. Today's July CPI report is the week's most critical figure. Forecasts suggest a 3.4% annual increase and a 0.1% monthly rise, with core inflation expected at 2.5%.
The Fed remains divided: while last week's weak employment report reduces the pressure to hike rates, inflation remains above the 2% target, and expensive oil threatens to reignite price pressures. Traders currently price in a 50% chance of a September rate hike. A hotter-than-expected index will likely weigh on markets, while a moderate reading could support gains.
For the Israeli investor, yesterday's Elbit performance serves as a sharp reminder: a high stock multiple leaves no room for error. When a stock trades at a multiple over 40, much of its future success is already "priced in," meaning stretched valuations lead to higher volatility in both directions.
