The past Jewish year, from October 2024 until today, was one of the most rewarding for Israel’s capital market. Despite geopolitical strain, the local stock exchange posted striking gains: the TA-125 rose by about 50%, outpacing most global bourses. Government bond yields fell by roughly 80 basis points across the curve, signaling lower perceived risk, and the shekel strengthened about 12% against the US dollar, moving from around NIS 3.7 to NIS 3.3–3.4 per dollar. The data point to revived investor confidence, while also raising a fair question about stretched valuations.
Israel contended with a wide range of security, social, and economic challenges. Militarily, the country fought a prolonged campaign against Hamas in Gaza, exchanged fire with Hezbollah on the northern border, confronted the Houthis in Yemen, managed the Syrian arena, and faced a brief direct clash with Iran in June 2025. At home, political divisions fed social tensions, and the fiscal deficit widened to about 5% of GDP.
Yet, the Tel Aviv Stock Exchange rallied sharply, and sentiment improved, helped by a perceived easing of immediate threats from Hezbollah and Iran, as well as strong corporate results led by the financial and communications sectors. Given the magnitude of the outperformance versus global markets, however, local equity valuations now appear elevated, which suggests a reassessment of portfolio allocation is warranted.
The road ahead: more US, less Israel
The gap between the strength of the local market and US benchmarks suggests it is prudent to rebalance risk. In the coming year, I favor shifting portfolios toward non-local assets, with approximately 60% allocated primarily in the United States and about 40% in Israeli assets. This reduces reliance on a potentially overpriced and more volatile home market and increases exposure to leading global sectors.
The global sleeve should emphasize technology, particularly the development of Artificial Intelligence infrastructure, cybersecurity, cloud computing, and software with AI capabilities. These segments have shown resilience and continue to deliver strong revenue and profit growth. Investment in AI infrastructure, including data centers, dedicated chips such as ASICs, and the networks that connect and power them, is becoming the backbone of the accelerating digital economy. Cybersecurity grows in importance as attacks become more frequent and sophisticated, and cloud adoption continues as firms seek flexible, efficient infrastructure. Together, AI infrastructure, cyber, cloud, and software form a durable growth engine for the next decade.
Energy is poised to benefit from unprecedented demand growth, driven by the increasing adoption of electric vehicles and the rapid expansion of data centers following the surge in AI adoption. Solar generation is expanding rapidly, driven by the global shift to clean power, lower installation costs compared to conventional plants, and declining energy-storage costs. Many green-energy firms carry leverage, so lower rates should lift profitability. The combination of long-term demand, declining costs, and a softening rate environment makes this sector attractive.
Assuming inflation continues to moderate, the Bank of Israel is expected to lower interest rates gradually in the new year. Lower financing costs should improve profitability across income-property companies.
The outgoing year was exceptional for Israel’s capital market, which outperformed many leading global markets. Even so, disciplined rebalancing, a greater emphasis on global growth trends, and targeted exposure to fast-growing sectors can help manage risk responsibly in the year ahead.
I wish us all a year of stability and growth, a thriving capital market, and a steadily improving geopolitical environment.