The Tel Aviv 125 (TA-125) index concluded the penultimate week of 2025 with a significant technical retreat, momentarily cooling a historic bull run that saw the Capital market hit multiple all-time highs earlier in December. While the benchmark remains one of the top global performers of the year, a combination of regulatory threats and natural profit-taking has introduced a layer of caution for investors entering 2026. This week’s movement reflects the delicate balance between Israel’s robust economic recovery and the fiscal challenges of a post-conflict budget landscape.

Fiscal Policy Clashes and the Banking Sell-Off

The primary catalyst for the week’s downturn was a sharp escalation in tension between the Ministry of Finance and Israel’s banking sector. Finance Minister Bezalel Smotrich issued a public warning on Thursday, stating he would double a proposed excess profits tax from 15% to 30% if banks withdrew the public benefit packages implemented during the war. This regulatory uncertainty caused the TA-Banks index to tumble by 4.2%, with major institutions like Bank Hapoalim and Discount Bank seeing significant daily losses. The Bank of Israel has voiced opposition to the tax, citing potential long-term damage to the economy, yet the political friction remains a primary risk premium for the index.

Insurance Correction and Sectoral Divergence

Compounding the losses in financials was a steep downward correction in the insurance sector, which had been a leading driver of the 2025 rally. The TA-Insurance index plunged 6.89% as investors moved to lock in year-end gains, with Harel and Phoenix Holdings suffering some of the steepest declines. In contrast, certain defensive and high-growth segments showed resilience; ICL Group surged 4.75% and Next Vision continued to find support following a record-breaking order earlier in the week. This divergence highlights a transition from broad-based buying to more selective stock analysis based on individual company fundamentals.

Macroeconomic Tailwinds and Global Context

Looking at the broader economic picture, Israel’s macro data continues to support a positive long-term outlook. Inflation has stabilized at a 4-year low of 2.4%, which allowed the Bank of Israel to deliver its first interest rate cut in nearly two years last month, bringing the benchmark to 4.25%. For international investors in Israel and globally, the USD/ILS exchange rate stability around 3.18 has preserved the value of ILS-denominated assets. The S&P’s revision of Israel’s outlook to “Stable” further reinforces the narrative that the economy is successfully rebalancing toward growth.

Looking ahead, the outlook for the TA-125 remains tethered to the Bank of Israel’s next interest rate decision on January 5, 2026. While the recent 3% dip may signal a cooling period, the index’s ability to maintain the 3,600 support level will be critical for a rebound in the first quarter. Key risks to monitor include the finalization of the 2026 budget and any potential tax increases that could further dampen corporate earnings. However, with GDP growth projected at 4.7% for 2026, the fundamental trajectory for the Israeli market continues to suggest opportunities for those positioned in high-tech and reconstruction-linked sectors.