Markets Bet on a New Middle East as Israeli Economy Faces Billion-Shekel-a-Day War
The Tel Aviv stock market is climbing as missiles fly. Behind the charts is a global bet that this war with Iran will redraw the region and that Israel will emerge stronger.
As air raid sirens wail across Israel and footage of missile interceptions dominate the Israeli news, something entirely unexpected is happening to the Tel Aviv Stock Exchange: it’s rising.
Since Sunday, Israel’s main stock index has been rising steadily. The shekel has strengthened, and the cost of insuring Israel’s government debt has decreased. In simple terms, the financial markets are showing unexpected confidence, even though the country is deep into its sixth day of direct war with Iran.
“This is a war—not an operation, not a campaign,” Adrian Filut, an economist at the Hebrew University of Jerusalem, told The Media Line. “It’s a war between two countries. And in a matter of hours, both went all in.”
According to Filut, who’s also chief economic commentator at Calcalist, a leading Israeli financial daily, what makes this moment unique is not just the severity of the conflict but the way markets have chosen to respond. “Markets are not reacting to the present—they’re reacting to the future. What you’re seeing is the repricing of the new Israel or the new Middle East,” he said.
If you had asked someone six days ago what would happen to these three market indicators, they would have told you the exact opposite of what we’re seeing now.
The investor logic, Filut explains, hinges on expectation, with markets making the bet that Israel will win this war. Positive indicators include the strength of the shekel; the Tel Aviv 35 index, a benchmark of Israel’s largest publicly traded companies; and credit default swap spreads, which reflect the perceived risk of government debt. “If you had asked someone six days ago what would happen to these three market indicators, they would have told you the exact opposite of what we’re seeing now,” Filut said.
“We don’t know exactly how—whether the regime collapses, or whether the IDF disables Fordow or Natanz, or something else entirely. But the assumption now embedded in the market is that there won’t be a Hamas, there won’t be Syria, and Iran will be diminished,” he added. “That’s a new regional order.”
Similarly, Avi Hasson, CEO of Startup Nation Central, highlighted the resilience of Israel’s high-tech sector amid ongoing conflict. Despite more than a year of constant conflict, the tech economy has shown “consistent growth and deal flow,” he said.
“Israeli founders have proven they know how to operate in uncertainty,” Hasson said. “They adapt quickly, stay focused, and continue to execute. The resilience we’re seeing is not a one-off. It’s embedded in how this ecosystem works; we still deliver no matter what.”
He explained that despite the escalation of conflict into a direct war with Iran, Israel’s startup sector is not fazed. The Israeli software company Wix recently announced an $80 million acquisition of the backend developer tool Base44, and the Israeli social trading company eToro completed an initial public offering on Nasdaq. “The offering was significantly oversubscribed, signaling continued investor confidence in the fundamentals of Israeli tech,” Hasson said.
But this bullish sentiment is at odds with the reality on the ground, where Israel is incurring enormous daily costs.
“The cost of a partially closed economy is about 1 billion shekels [$290 million] per day,” said Davey Disatnik, a professor at Tel Aviv University and a member of the Tel Aviv municipal council. “Right now, only emergency businesses are operating. That’s part of the reason the Home Front Command changed its guidelines after several days.”
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Disatnik emphasized that even as the stock market climbs, core sectors remain frozen. “We are in a state of emergency,” he told The Media Line. “Schools are closed. Public transportation is still not fully functioning. Many workplaces remain shut unless they have access to protected spaces.”
Despite the military precision of Israel’s air campaign, the war is disrupting daily life in Israel in ways not seen even during extended campaigns in Gaza. “In Gaza, wars dragged on, but the economy kept running,” Disatnik said. “This is different.”
“There are already reports suggesting the defense budget could jump to 200 billion shekels [$57 billion] this year,” Disatnik noted. “This includes not just military operations, but also reconstruction, evacuee compensation, and financial aid for affected populations.”
One of the most concerning aspects is the limited capacity of Israel’s existing emergency funds. Dillard noted that only 9 billion shekels, or about $2.6 billion, are left in Israel’s property tax compensation fund after distributing some 20 billion shekels, or $5.7 billion, over the course of the war with Hamas.
Macroeconomically, there may be structural vulnerability beneath Israel’s resilient surface. Filut warned that fiscal policy may be Israel’s Achilles’ heel.
“Public debt is now at 70% of GDP, which is extremely high for a country with Israel’s risk profile,” Filut said. “This year, we’ll pay 57 billion shekels [$16 billion] just in interest on that debt—7 billion [$2 billion] more than last year.”
He did not mince words when it came to fiscal leadership, saying that Finance Minister Bezalel Smotrich “hasn’t demonstrated competence.” “Coalition funds are being allocated heavily into sectors like the ultra-Orthodox education system, which in many cases doesn’t teach math, English, or physics,” he said. “That weakens long-term productivity and workforce participation.”
Still, both Filut and Disatnik acknowledged that the markets may be on to something.
The idea is that if Iran is weakened, the region changes. If a new Middle East emerges—if there’s Saudi-Israeli normalization, if Iranian proxies are pushed back—that’s good for the economy in the long run.
“There’s logic behind the optimism,” Disatnik said. “The idea is that if Iran is weakened, the region changes. If a new Middle East emerges—if there’s Saudi-Israeli normalization, if Iranian proxies are pushed back—that’s good for the economy in the long run. But it’s very hard to quantify that right now.”
He believes markets may also be pricing in external intervention. “It’s possible the stock market is also assuming the Americans will get involved,” he said. “That would shorten the war, and investors may be expecting that. It’s consistent with how quickly things have recovered since Sunday.”
But if the war drags on, both experts warned, all bets could be off.
“The success of Israel’s military campaign depends on one variable: duration,” Filut said. “Everything you’ve seen—the strategy, the precision, the overwhelming advantage—it only holds as long as the war is short. The moment it stretches out, support starts to weaken.”
“Statistically, the longer a campaign continues, the higher the chance something goes wrong,” he said,
Disatnik agreed. “If the conflict extends and the sense of achievement begins to erode, then the market’s confidence may not hold. The perception of success is fragile.”
Iran produces 3.3 million barrels of oil per day. That’s 100 million per month or 1.2 billion per year. The world economy cannot function in peace without that volume.
And then there’s the global dimension: oil. Filut was blunt: “Iran produces 3.3 million barrels of oil per day. That’s 100 million per month or 1.2 billion per year. The world economy cannot function in peace without that volume.”
While Iran is not the world’s top producer, it is a critical supplier, and even minor disruptions can have a ripple effect globally. “If Iranian oil disappears from the market, prices will rise. The only question is how much,” Filut said.
So far, Brent crude oil has risen about 12% since the war began to nearly $78 per barrel. “I would have thought we’d already be in the $80 to $85 per barrel range by now,” Filut said. “But we’re not there yet. If it hits 85, we’re in a new scenario. If it reaches 90 or more, it becomes politically and economically unsustainable.”
Filut believes that the memory of the Ukraine war and the resulting inflation spike still haunts Western capitals. “Governments paid a heavy political price to control inflation after Ukraine, and they haven’t fully succeeded. Interest rates are still high, and central banks are hesitant to cut them. They simply cannot afford another inflation wave—especially not one driven by oil,” he said.
That dynamic is also limiting how long the West will tolerate this conflict, he said. “The US and Europe won’t let this go on too long. If oil hits 100 or 110, it’s game over. The geopolitical cost becomes too high,” he explained.
Filut expressed doubt that worst-case scenarios would materialize. “This isn’t really a war between two countries. It appears to be the case, but in reality, it’s a complex conflict involving multiple players and international stakes. The only actors who benefit from a prolonged war are Putin and the oil-exporting states,” he said.
Were he adviser to Prime Minister Benjamin Netanyahu, he would urge him to end the war quickly, frame it as a strategic victory, and hold elections immediately, Filut said.
“This war was prepared meticulously. For at least 20 years, Israel has anticipated this moment. The execution was brilliant. This is Netanyahu’s opportunity to replace the memory of October 7 with June 13,” he said.
As the war enters its second week, the market still believes. But the clock is ticking. The bet on a new Middle East is a high-stakes one—and it’s not yet clear whether it will pay off.
