Despite the wars: Tel Aviv defense index crashed by 42%
After a massive rally and significant capital inflows, investors betting on the defense industry have suffered a painful blow. We analyze the reasons behind the rapid collapse and the potential impact of future IPOs from industry giants.
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A remarkable trend is unfolding within the Tel Aviv defense index. Launched to capture the massive demand for Israeli defense products amid ongoing conflicts, the index initially attracted significant investor interest, with many viewing the Israeli defense sector as the "next big thing." Following its launch in November 2025, the index soared by double digits, drawing substantial capital into tracking funds. However, the inevitable correction followed the hype, with the index plunging by 42%. Given that most capital inflows occurred near the peak, the majority of investors have incurred losses.
This raises the question: why the decline, given that the industry remains robust? Just recently, Elbit Systems announced new contracts totaling 270 million dollars, and Ashot Ashkelon reported an agreement with the Ministry of Defense worth 83 million NIS.
Factors behind the decline
First and foremost is pricing. The rally in defense stocks was excessive; these stocks had already surged significantly before the index was launched, and they continued to climb to unsustainable levels. P/E multiples reached 50–60, reflecting overly optimistic growth forecasts despite the companies' already strong performance. For instance, Elbit Systems' stock has fallen by 31%, yet it still trades at a forward P/E of around 40, with a current P/E of approximately 50.
Another factor, specific to Israeli defense firms, is the dollar-shekel exchange rate. As primary exporters, these companies earn revenue in foreign currency while paying operating expenses, such as salaries, in shekels. The weakening of the dollar against the shekel has caused a double-digit decline in shekel-denominated revenues, significantly impacting their bottom lines.
Finally, the structure of the index itself is a concern. Due to the limited number of defense companies on the Tel Aviv Stock Exchange, the index includes firms that, arguably, do not fully represent the quality of the Israeli defense industry. However, the potential future public offerings of giants like Israel Aerospace Industries and Rafael are expected to improve the index's composition and overall quality.
