The TA-SME60 index, which tracks the 60 largest companies on the Tel Aviv Stock Exchange not included in the TA-125, concluded the final full trading week of 2025 with a significant technical retreat. While the index has benefitted from a year of exceptional economic momentum and improved investor sentiment, the final days of December introduced a wave of fiscal uncertainty that momentarily dampened the “Santa Claus rally”. This volatility underscores a maturing market that is increasingly sensitive to domestic regulatory shifts and the finalization of the 2026 state budget.

Regulatory Headwinds and the Banking Influence

A primary driver of the index’s late-week performance was the escalating tension between the Ministry of Finance and the banking sector. Finance Minister Bezalel Smotrich warned that the government might increase the proposed excess profits tax from 15% to 30% if lenders followed through with threats to withdraw consumer benefit packages. Although the TA-SME60 represents mid-cap entities, the resulting 4.2% drop in the TA-Banks index triggered a liquidity squeeze and a general re-evaluation of risk premiums across the Capital market. This friction remains a critical risk factor for mid-caps that rely on stable credit environments for growth.

Sectoral Resilience Amid “Profit-Taking”

Despite the daily 1.28% dip on Thursday, December 25, the underlying financial performance of the index remains robust, with 15 components managing to post gains in a broadly red market. Sectors like high-tech and defense showed notable strength; for instance, Next Vision gained 1.39% following news of a major order, while rumors of an IPO for Rafael’s DSIT unit highlighted the deep investment portfolio interest in Israeli security technologies. Furthermore, retail sales data and improved consumer morale suggest that the domestic engine of the TA-SME60 companies remains operational, even as large-cap insurance and banking stocks face year-end tax-motivated selling.

The Path to 2026: Monetary Easing and Growth

The broader context for Israeli equities remains highly favorable compared to global peers, with The Economist ranking Israel as the third-best performing economy in the OECD for 2025. This strength is underpinned by inflation falling to 2.4%, well within the Bank of Israel’s target range, which paved the way for the first interest rate cut in nearly two years last month. For international investors, the shekel’s strength—reaching a 4-year high against the US dollar—has enhanced the total return of ILS-denominated assets, making the TA-SME60 a key target for diversification.

Looking ahead, the outlook for the TA-SME60 is centered on the Bank of Israel’s next move and the resolution of fiscal disputes. Analysts expect the interest rate to fall to 3.75% by September 2026, which should lower financing costs for mid-cap firms and potentially revive the real estate sector. Key risks to monitor include the potential for renewed inflation if the 2026 budget proves too expansionary and the impact of U.S. trade policy on defense exports. Investors should watch the 1,236 support level; holding this mark into the new year will be essential to maintaining the long-term bullish trend.