The sector that “doesn’t look good” and which stocks are expected to soar following the ceasefire?

On Wednesday, the American S&P 500 index climbed by 2.5%, the Nasdaq added 2.8% and European indices jumped by 4-5%. A day later, the Tel Aviv Stock Exchange, which returned from a holiday break, joined the positive trend with price increases of about 2% in the leading indices (and at the beginning of April it rose by over 6% in three trading days – approaching the record level). The shekel has also strengthened by more than 1% against the dollar since Trump announced the ceasefire.

Amidst the euphoria surrounding the markets, cracks quickly appeared that reminded how fragile the ceasefire could be. The Iranians claimed substantial violations and threatened to be absent from the planned negotiations, and Trump, for his part, made it clear that the large ‘war machine’ in the Gulf will remain there for the time being, and will be ready to renew fire if necessary. These cracks even led to a turning point in the price of oil, which returned to rising slightly after the drop.

Rami Dror, CEO of Valio Advanced Investments, pointed out that “the price of oil is currently the main variable that dictates the direction of the markets after the ceasefire. The sharp drop we saw is actually a discharge of the geopolitical risk premium, but it is important to understand that this is not necessarily a linear trend. Any return to escalation will quickly return volatility to energy prices.”

Sectors: Security yes, real estate no, and where is a short rally expected?

Amit Atar, co-CEO of Mor Mutual Funds, believes that the fact that the Lebanese arena remains open will, even in the absence of a renewed escalation with Iran, delay the lowering of the Bank of Israel’s interest rate. The real estate industry will be particularly affected by this. “The residential sector in the stock market has not looked good recently, and rightly so,” he said. “It is not expected to recover in the near future, as we have moved away from the market’s expectations for further interest rate reductions, and the apartment buyers have yet to return.” The yielding real estate in Israel is also less attractive in his opinion.

On the gainer side, Massman decorated the defense stocks, which have already risen sharply since the beginning of the year. “Iran remains a weakened enemy – but the arena is open. The Europeans are required to arm themselves to face Russia. However, investments in the defense sector must be chosen with tweezers, as it is a very divided sector in terms of pricing (some shares are at high double-digit multiples), but it is expected to continue to function well, and that is why we still like it,” he says.

Dror of Vallejo agrees with this position. “The defense sector is expected to continue to benefit from structural demand, while interest-sensitive sectors such as real estate will receive indirect support if inflation pressures continue to moderate. Although the trigger is geopolitical, the effect is broad and creates a clear distinction between winning and losing sectors.” He adds that the shocks in the oil market may increase the attractiveness of renewable energy and the infrastructure sector: “The energy security thesis is getting stronger, which increases the viability of investing in renewable energy and infrastructure – a trend that does not weaken even after the drop in oil prices.”

Wall Street: Have more fun?

Although since the beginning of April, the Tel Aviv Stock Exchange has been outperforming Wall Street, but in Atar Mamor’s estimation the ceasefire may change the picture, at least in the short term. “It is clear that the ceasefire in its current formula is better for the American markets than for the Israeli one,” he says, adding that there they were worried about oil prices, which had less of an effect on us due to the stability of the cost of natural gas for the economy. The Lebanese one remains open.”

Atar mentions that a wave of technology IPOs is on the agenda on Wall Street – including Elon Musk’s SpaceX satellite company, the artificial intelligence company Anthropic, and possibly OpenAI, which operates GPT chat. “There is room for short-term optimism in the US. If the war really ends, the markets will feel that they can go on a rally,” he said. Let’s recall that since the beginning of the year the S&P 500 fell by about 1%, while the TA-35 index rose by 19%, and this before taking into account the strengthening of the shekel against the dollar during that period.

Interest reductions: Return to the table – also in Israel

The war raised the fear of a new global inflationary wave, which pushed the markets to estimate that the reductions in interest rates in the world will be off the table and will even be replaced by increases. In the US, interest rate futures now reflect a 25% chance of an interest rate cut in the US by the end of the year. This is a decrease compared to a 65% chance of a reduction that will be priced immediately upon the entry of the ceasefire, but this is also a significant change compared to the situation before the ceasefire – so the traders will even price in a certain likelihood of an interest rate increase by the Central Bank (Fed).

However, even if the ceasefire is maintained, the war will also affect the course of inflation and interest rates in Israel and in the world in the medium term. Modi Shafferer, Chief Financial Markets Economist at Bank Hapoalim, explains that “inflation expectations around the world rose sharply in light of the war. In Europe, expectations for the next five years rose by about 40 basis points per year. In Israel, they were very low before the war and did not rise significantly at the beginning. Therefore, one of the recommendations given to investors at the beginning of March was to take advantage of the low inflation pricing and purchase index-linked instruments – short-term government bonds and medium, as well as inflation contracts.”

Thus, even though inflation in Israel is expected to rise, Shafferer believes that it will remain within the limits of the Bank of Israel’s target – 1%-3% in annual terms. “The interest rate in Israel will fall this year. I recommend taking advantage of the increase in yields and buying medium-term bonds,” says Shafferer. “Although there is an increase in the defense budget, but after the latest interest rate announcement, the governor made it clear that even if interest rates rise in the world – we are in a different cycle, since the world has lowered interest rates and in Israel they have not.”

In the scenario of the collapse of the ceasefire: Trend reversal in the markets?

The market estimates that the collapse of the ceasefire and a return to fighting with Iran will be a negative event that will reverse all the trends described. “You have to remember that the market is looking ahead and not at the event itself: as long as it is a temporary and fragile ceasefire, volatility will remain high,” says Yossi Barak, Chairman of the Barak Finance Group. “There is a potential for a rally here, but it is based on the assumption that the geopolitical risk is indeed declining and will not return strongly.”

Barak explains that “the ceasefire is first and foremost a macro event of a drop in the risk premium, and this quickly spills over into all economic variables. The drop in energy prices reduces inflationary pressures, the shekel strengthens, and the markets begin to re-price a scenario of monetary easing, or at least a halt in tightening. This means a transition from a ‘crisis management’ environment to one where investors return to taking risks.”

Atar concludes that a situation of the collapse of the ceasefire will bring oil prices back up and lead to lateral declines in the stock markets: “A scenario of American ground entry into Iran is another serious concern for the markets.”