The Israeli small and mid-cap sector is currently navigating a period of price discovery following a historic rally that saw major indices hit all-time highs earlier this month. As of the close of the first week of February 2026, the TA-SME60 index reflects a broader market sentiment of cautious optimism, balancing a strong domestic economic recovery against lingering regional risks.

Weekly Performance and Market Technicals

The index closed the week at 1,323.04, marking a -0.26% decline on Friday and a total -0.76% drop over the last five trading days. While these figures represent a minor correction, it is important to note that the index is still trading near its upper 52-week bound of 1,372.37. The weekly volume of 6,112,533 was notably lower than the 9.6 million average, suggesting that the recent downward movement lacks the aggressive selling pressure typically associated with a trend reversal. Technical indicators currently signal a “Sell” to “Neutral” stance in the immediate short term as the market digests recent gains.

Sector Diversification and Resilience

The TA-SME60 remains a critical gauge of the “real” Israeli economy, with a heavy weighting in Real Estate (approx. 55%), High-Tech (27%), and Finance (17%). This week, performance among constituents was mixed. Generation Capital Ltd emerged as a top gainer with a +3.69% jump, while companies like Ellomay Capital and Arad faced headwinds, dropping -3.68% and -2.85% respectively. This divergence highlights the importance of a bottom-up investment approach in the SME sector, where individual company fundamentals and recurring revenue models are increasingly prioritized over general market momentum.

Economic Tailwinds and Strategic Outlook

The broader macroeconomic backdrop for 2026 remains highly supportive. Staff from the IMF recently projected Israel’s GDP growth to accelerate to 4.8% this year, driven by a rebound in private investment and consumption following the Gaza ceasefire. Furthermore, inflation is expected to stabilize below 2% by mid-2026, which may allow the Bank of Israel to gradually reduce policy rates, providing a significant valuation tailwind for mid-cap companies sensitive to borrowing costs.

The outlook for the TA-SME60 remains bullish for the medium term, though investors should prepare for continued volatility. The primary factors to monitor in the coming weeks include the 2026 budget discussions and any shifts in the regional security environment that could impact risk premia. While the current 1-month return is slightly negative at -1.38%, the 3-month gain of +11.44% suggests that the structural growth story of Israeli innovation and SME resilience remains intact. Market participants should watch for a stabilization level around the 1,300 mark; a successful defense of this psychological floor could catalyze the next leg of the rally toward new record highs.