Chartbook 396 Strangelove in the Middle East - or how the markets learned to stop worrying and love Israel's rampage.

Here’s a shocking fact:

If you had bought the Israeli stock index on October 7 2023 you would have made more money than in any stock market in the world. Since the Hamas attack, as Israel has reduced Gaza to rubble, the Tel-Aviv stock market has surged. Within four weeks of the attack, the markets rebounded. As of July 2025, with international money flooding in, the index is up 80 percent in dollar terms.

Source: Bloomberg

Reading the brave report by UN Special Rapporteur Francesca Albanese’s entitled “From economy of occupation to economy of genocide”, you might say, no surprise. The rampage unleashed by Netanyahu’s government has been good for business both in Israel in the US and Europe. The occupation is deeply interwoven with corporate interests. The occupation and construction of illegal settlements is integral to Israel’s real estate boom. More profits have been earned from the devastation of Gaza.

Meanwhile, in the mainstream financial media, commentators like Ruchir Sharma rattle off the scale of Israel’s R&D spending and the rate of Total Factor Productivity growth. …

Spillovers from defence have made Israel a global leader in fields from air-traffic control to, above all, cyber security. With more start-ups per head than any other country, its business culture is closer to that of California than the Middle East. It has 73 start-ups in the hot field of generative artificial intelligence, the third largest in the world. Half of its exports are tech products — a share few advanced economies can match — while its neighbours still export mainly oil, an old-fashioned commodity. The result is an isolated productivity miracle. Total factor productivity, which captures how well labour is using new machines, has grown four times faster in Israel than in other developed economies over the past 25 years, and that gap has widened in the past five years. In tech-driven Israel, GDP per head has nearly tripled since 2000 to more than $55,000, rising from 50 to 70 per cent of the level in the US. In petrol states — and not only those of the Middle East — incomes tend to rise, fall and ultimately stagnate with the long-term price of oil. Saudi Arabia’s per head GDP is a third of that in the US, roughly the same as it was 25 years ago. To many observers, the geopolitical situation in the Middle East still seems precarious. But the market’s optimistic take on Israel’s tech-driven economy is now showing up in economists’ forecasts, which are projecting growth at nearly 4 per cent in coming years. That’s relatively strong for a developed nation. It validates the market view that Israel is cementing its status as the region’s dominant economic force.

Israel’s transformation from an inflation-racked crisis case in the 1980s, to a global champion of high tech with a per capita income now higher than that of Germany makes it essential to understanding how it remains an attractive partner for global capital, even as it commits mass murder and ethnic cleansing and embarks on a campaign of regional revisionism on a huge scale.

One of the risks in this kind of political economy of Israel’s current policies - both the critical and the celebratory variety - is that it exaggerate their stability and coherence. Paradoxically it thereby underestimates the dangerous dynamic of historic escalation that we are witnessing.

Looked at closely in chronological terms, what becomes clear is that the relationship between grand strategy and the fortunes of Israeli business, as reflected in the stock market, is far more complex and more uncertain than ex post evaluations of recent stock market highs would suggest. Though Israel has scored considerable victories and its massive violence is increasingly erasing any possibility of Palestinian statehood, Israel’s political economy is marked by incoherence and risk as much as by deep logic. The current stock market rally did not proceed smoothly from 2023 onwards, but involves a sudden and rather convulsive doubling-down on high-risk strategies of preemption and novel forms of violence.

---

The starting point for any evaluation of Israel before the recent bout of triumphalism was, after all, that the political frame for this neoliberal capitalist success story was unsettled and faced huge and unanswered long-term questions.

Israeli politics was deeply divided over domestic constitutional issues, the status of the ultra-orthodox and the figure of Netanyahu, resulting in five Knesset elections between 2018 and 2022.

Israel’s ethnically and religiously divided politics are split at least four ways between on the one hand the (1) ultra orthodox, (2) the Israeli Arabs, (3) Zionists of the ilk of Netanyahu and (4) what is left of secular centrist and liberal politics.

This is not a stable mixture.

The rapid demographic growth of both the ultra-orthodox and Arab segments of the population poses fundamental questions about Israel’s political and social coherence. Netanyahu maneuvers frantically to maintain his coalition.

Despite the high rate of R&D investment and the high rates of TFP growth, investors had good reason to hedge their bets.

The strong upward movement in Israeli stock markets that began in the late 2010s, came to a halt in 2022 amidst constitutional crisis. In the first three quarters of 2023 the markets were very unsteady.

And this was when Israel was preoccupied with its own internal issues.

Then bloody and traumatic attacks of October 7 forced Palestine back to the top of the agenda.

---

In the week following the attack, markets plunged and then recovered.

As highlighted by the Albanese report, defense spending surged, creating opportunities for profit. But what followed in the stock markets was no war boom. Equities recovered, but then moved unsteadily around the level they had reached in 2022.

The unexpected mobilization was disruptive to the economy at large. Israel’s extreme violence made headlines and was disturbing even to its defenders.

You may be able to make money from surveillance technologies. But in the broader scheme of global capital markets - the level at which Tel Aviv investors would like to play - the question of Palestine and the ongoing settler-colonial question is a running sore. Palestine is not the driver of Israel’s capitalist success story. It is the bloody, unresolved puzzle.

The ongoing assault on Palestine may fulfill political imperatives and answer the interests of the settler coalition. Armaments firms do well. But the best thing for the markets and global investors is that one should talk about the Palestinian issue as little as possible. The scandal unleashed by Boston Consulting Group’s exposure to postwar planning for Gaza is indicative of how things can go very wrong even for a well-connected “global player”.

The stage on which Israeli capitalist triumphalism is played out is not first and foremost ethnic cleansing and urbicide, or grubby battles over olive groves, but in the AI race and grand regional infrastructure planning. This is the arena of the Abraham Accords, specifically designed to render secondary the Palestine question.

Rather than celebrating the Gaza campaign, markets were echoing more general questions about Netanyahu’s strategy. Israel was embarked on a forever war. Whilst Gaza remained the main news item, the markets did not flourish but moved sideways.

The answer came in the dramatic and successful extension of Israel’s campaign of revisionism beyond Hamas and Gaza, to Hezbollah in Lebanon, to Syria and then to Iran in June 2025.

---

Like other observers, it now seems clear that the financial markets underestimated the scale of Israel’s military edge, both over Hezbollah and Iran. It is Israel’s superiority in those campaigns, not the horrible attritional demolition of Gaza, that has lit a fire under the Tel-Aviv markets.

If we have to name a starting point for the Israeli’s stock market boom, it is September 17/18th 2024, when Israel’s secret services triggered thousands of small explosions in Hezbollah beepers and walkie talkies - the so-called “Grim Beeper” attacks. Nothing has signaled more clearly than this operation Israel’s overwhelming superiority in long-range planning, technology and sheer cunning.

The markets have not looked back since.

In 2025, Israel’s strike on Iran and its backing by the United States has driven home the confidence in its military superiority. During the two-week war, the shekel surged.

The wars with Hezbollah and Iran do not involve as much sustained devastation as the assault on Gaza. They are not immediately tied to Zionist settler-colonialism. They are the actions not of a settler-colonial state in formation, but of an established nation state, acting as a belligerent regional hegemon. As such they are far more consequential in changing the market narrative. They signal Israel’s superiority not over the desperate fighters of Hamas, let alone the defenseless and starving population of Gaza, but over all neighboring states. Furthermore, they showcase the superiority not of bulldozers and dumb bombs, but of Israel’s truly high tech weapons, the Iron Dome and even more its ultra-sophisticated extra-atmospheric missile defense.

It is the combination of technological dominance, geopolitical success and regional dominance that has unleashed a stock market boom, which is propelled above all by Israeli tech stocks riding the AI wave, even ahead of defense, but which is broadly based.

---

It is the success of Israel’s regional wars, which explains the scale and timing of the stock market boom. And it is indeed impressive. But pause for a moment to consider the logic.

If we take the current level of the market at face value and believe that it is the right one, then the question is, why was Israel’s military dominance not “priced in”, well before September 2024? Why was the market undervaluing Israel’s regional dominance?

One answer might be simply that of ignorance. Markets are not perfect. They underestimated how dominant Israel’s new weaponry would be. Having been given a demonstration, they have reevaluated their priors.

Another answer is more political and more ominous. The issue is not market information, but political evaluation.

Until recently markets were wedded to a framing that saw Netanyahu and his coalition as a potential threat to the Israeli miracle. This threat became manifest in the constitutional crisis of 2022-2023 and was reflected in setbacks to the market.

Gaza did not change that sense of impasse. The war against Iran and its proxies has.

As Omri Zerachovitz of Haaretz reported after Israel’s assault on Iran:

"For the first time in two decades, the capital market sees in a war hope for a better security and economic era for Israel," Tsuk says. "Investors don't seem to believe that this conflict was just another round of fighting and another fleeting victory. "It may lead to a fundamental change in the strategic structure of the entire Middle East and a significant decrease in Israel's risk premium in the long term." The market's reaction to the Iran war was more like the aftermath to Israel's killing of a military or political leader of one of its foes. "These were perceived as creating deterrence and a balance of threats that changed the rules of the game. This is different from the tit-for-tat patterns we've known in long military operations," Tsuk says. "Investors seem to believe that this major upheaval will bring greater clarity for Israel's security and economy, opening the door to new opportunities and a more stable security-economic order in the region."

Israel has assertively stamped its power on the region. And, in so doing, it has revealed the previously untested powers of its military.

What has emerged from the series of crises is a new and violent synthesis of military power, technology and politics. This new synthesis is captured both in the crowing of the market columnists and in the forensic detail of Albanese’s brave report. But this synthesis was not pre-given. It is a product of the crisis and the successful strategy of escalation pursued by the Netanyahu administration.

The synthesis is far from complete. Netanyahu’s coalition remains fragile and vulnerable concerning the demands of the ultra-orthodox. But in the equation of money and power, the signs have been shifted.

Even as Israel deliberately starves and kills the population of Gaza and targets the political leadership of Iran, the markets boom. Meanwhile, amplifying the narrative, the FT’s headline reads: “The markets are signalling a clear winner in the Middle East”.

---

Thank you for reading Chartbook Newsletter. I hope you find that it offers valuable insights, interest and provocation. What sustains the effort are voluntary subscriptions from paying supporters. If you are enjoying the newsletter and would like to join the group of supporters, click here: