The political affinity with Donald Trump is unmistakable: Scenes from the Likud party’s election-night gathering on October 28, 2026. The parliamentary election has left the question of a governing majority unresolved – and financial markets are reacting nervously.
Israel's parliamentary election has failed to deliver a clear majority. Prime Minister Benjamin Netanyahu's political bloc leads in the preliminary results but remains short of the seats needed to form a government. Financial markets are responding with losses as political uncertainty adds to the country's substantial defence spending, fiscal pressures and ongoing geopolitical risks. For investors, the question extends beyond the Tel Aviv stock market: How resilient can Israel's economic recovery remain while its political future is unresolved?
Election leaves Israel without a clear majority
Israel's parliamentary election on October 27, 2026, has left the country's political future uncertain. Preliminary results released on Wednesday morning show Prime Minister Benjamin Netanyahu's bloc in the lead, but without enough seats to form a government.
With 76.8 percent of ballot boxes counted, Netanyahu's political allies were projected to secure 54 of the Knesset's 120 seats. The opposition bloc led by former military chief Gadi Eisenkot stood at 47 seats, while Arab parties collectively accounted for 19.
A governing majority requires 61 seats, making coalition negotiations critical to the next government's formation.
These figures remain provisional. Votes cast by military personnel and other specially administered ballots have yet to be fully counted. Final results are not expected before the end of the week.
Voter turnout reached 77.7 percent, its highest level in more than two decades.
If negotiations fail to produce a viable coalition, the process of forming a new government could extend over several weeks. Netanyahu would remain in office in a caretaker capacity in the meantime.
That prospect is already weighing on investor sentiment.
Israeli stocks and the shekel retreat
Financial markets responded negatively to the emerging election results.
On Wednesday morning, Israel's TA-125 benchmark index fell as much as 1.7 percent on the Tel Aviv Stock Exchange. The TA-35 index, which tracks the country's largest listed companies, declined 1.5 percent, while the TA-90 index of mid-sized businesses dropped 3 percent.
Insurance stocks came under particularly strong pressure, with the sector index losing approximately 4.1 percent.
The Israeli currency also weakened. The shekel declined around 1 percent against the US dollar, trading near 3.08 shekels per dollar.
These figures reflect trading on the morning of October 28 and may change throughout the session.
Only a day earlier, the shekel had strengthened as investors anticipated an election outcome that might allow a new government to be formed quickly.
Attention has now shifted to the potential duration of coalition negotiations and the economic policies that any future government might pursue.
Ronen Menahem, chief market economist at Israel's Mizrahi-Tefahot Bank, told The Times of Israel that investors were looking for a stable coalition capable of maintaining credible fiscal policies and adopting a growth-oriented budget.
The immediate market reaction therefore reflects political uncertainty rather than a fundamental reassessment of Israel's economic prospects.
A single trading session, however, offers little indication of whether the losses will develop into a sustained market trend.
A remarkable stock market performance since 2023
The latest volatility contrasts sharply with the longer-term performance of Israeli financial markets.
Despite the Hamas attacks of October 7, 2023, the subsequent war in Gaza and additional military confrontations across the Middle East, Israeli equities have delivered substantial gains.
According to Reuters calculations, Israel's stock market had risen approximately 130 percent since October 2023 in the period leading up to the election. Over the same period, the shekel appreciated by around 25 percent against the US dollar.
That resilience is particularly striking given the considerable economic and security challenges Israel has faced.
The structure of the Israeli economy helps explain part of this performance.
Israel has an internationally significant technology and software sector. Many companies generate substantial revenues outside their domestic market, making their financial performance less directly dependent on local economic activity.
International investors have also maintained an interest in selected Israeli businesses and technology investments.
Nevertheless, the stock market's strength does not suggest that geopolitical risks have become irrelevant.
Investors must distinguish between the earnings potential of individual companies, the broader economic outlook and the risks arising from political or military developments.
War-related expenditure weighs on public finances
Regardless of which parties eventually form the next government, Israel faces significant fiscal challenges.
The Bank of Israel expects the budget deficit to reach 4.4 percent of gross domestic product in 2026, followed by 4.6 percent in 2027.
Public debt is projected to amount to approximately 68 percent of GDP at the end of 2026 before declining to around 66.5 percent the following year.
These forecasts already incorporate the continued burden of elevated defence expenditure.
Since October 2023, Israel has committed substantial additional resources to military operations, the mobilisation of reservists and wider security measures.
Such spending places pressure on public finances and reduces the resources available for other government priorities.
There have also been broader economic consequences, including temporary labour shortages caused by military mobilisation and disruptions affecting individual industries.
The central bank nevertheless anticipates an economic recovery. It projects growth of 3.4 percent in 2026 and 5.1 percent in 2027 for its measure of economic output excluding production abroad.
These projections, however, assume that the intensity of military activity remains relatively limited.
The Bank of Israel has explicitly warned that its forecasts do not fully account for potential policy changes following the election or the consequences of another major military escalation.
Political stability therefore matters not only for investor confidence but also for the government's ability to plan future expenditure.
Coalition talks will shape economic priorities
Whatever the eventual political outcome, Israel's next government will face several difficult financial decisions.
These include the level of defence spending, the financing of public services, potential tax measures and the conditions needed to encourage private investment.
The labour market also presents challenges.
Repeated military mobilisation has temporarily removed workers from businesses and other areas of economic activity. Security developments have additionally affected the availability of foreign workers, particularly in construction.
The Bank of Israel considers a recovery in labour supply an important factor supporting future economic growth.
Prolonged coalition negotiations could delay decisions on budgetary priorities.
That would not necessarily bring economic activity to a standstill. Public institutions and private businesses continue to operate during periods of political transition.
For investors, however, uncertainty increases when the direction of fiscal policy and the government's future financial commitments remain unclear.
The election does not immediately change Israel's underlying economic fundamentals. It does, however, influence expectations about the government's capacity to respond to existing challenges.
Markets await a government capable of taking decisions
Following the election, Israel and its financial markets face a combination of political, fiscal and security challenges – ranging from an unresolved government formation process to the risk of renewed Hamas attacks and the economic consequences of the war involving Iran.
The Israeli economy has demonstrated remarkable resilience in recent years. Its technology sector and stock market performance illustrate the country's substantial economic capabilities despite the pressures of war.
At the same time, fiscal constraints remain significant. Defence expenditure continues to weigh heavily on public finances, while the pace of economic recovery depends partly on developments in the security environment.
The inconclusive preliminary election result adds another layer of uncertainty.
For investors, the immediate issue is not simply which political bloc ultimately emerges in government, but whether a stable administration can be formed and what financial priorities it will pursue.
The declines in Israeli equities and the shekel demonstrate that markets are already responding to this uncertainty.
Future developments, however, will depend on more than coalition negotiations in Jerusalem.
The security situation in Gaza, relations with Iran and the stability of energy supplies across the Middle East will also remain relevant.
Israel's parliamentary election is therefore more than a domestic political event. Its economic implications could extend well beyond the country's borders, although their full significance will become clearer only as the political situation develops.
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