The conflict with Iran – and Iran’s retaliation – might trigger a contraction in Israeli GDP this quarter, but the experience of the 12-day war last year suggests that activity should bounce back quickly. And unlike in 2025, Israel enters this conflict with a stronger disinflationary tailwind that could leave open the possibility of interest rate cuts. Israeli markets have been buoyed by optimism over the weakening of Iran’s military and political regime, but whether the market rally can be sustained may depend on political developments within Iran as well as broader developments supporting the global tech and AI sectors.
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