U.S./Israel-Iran War: the Middle East On Edge
NextFin News - Gadi Eisenkot is ahead of Benjamin Netanyahu in every final poll before Israel's October 27 election, yet the surveys agree on one thing: neither man's bloc will win the 61 seats needed to govern. The race is not being decided by who gets more votes, but by who can assemble a coalition from the wreckage of a fragmented parliament - and that arithmetic is where the former army chief's campaign either becomes history or stalls in a hung Knesset.
The Lead That Isn't a Mandate
Four days before Israelis vote, the three main television networks published their final pre-election surveys, and all three showed the same shape. The bloc built around Eisenkot's Yashar party holds between 52 and 56 of the Knesset's 120 seats. Prime Minister Benjamin Netanyahu's governing coalition sits at 50 in every survey. The gap - two to six seats - is real, but it is not decisive.
Yashar itself is projected as the single largest faction, with 22 to 23 seats, ahead of Netanyahu's Likud at 19 to 21. On the personal question of who should be prime minister, Eisenkot leads 49 percent to 41 percent. But Israel does not elect a prime minister directly. It elects a parliament, and the prime minister is whoever can command 61 votes in a coalition negotiation that can last weeks after election night.
That is the central tension of this election. The polls show a country that has turned against Netanyahu after the October 7, 2023 attacks and the war that followed, but not one that has handed the opposition a workable majority. The Arab-majority parties are projected to win 14 to 16 seats, and Eisenkot has said he will not sit with them unless they accept his core principles, including the dismantling of Israel's enemies. Refusal to rely on those seats leaves his bloc short of 61 even when it leads.
Israel's electoral system turns that shortfall into a bargaining problem. The entire country is a single proportional-representation district with a 3.25 percent threshold - roughly four seats. Parties that clear it enter the Knesset; parties that fall short hand their voters' ballots to the lists that did. That is why the final surveys spent as much attention on the fringe as on the leaders. A new far-right party, Amcha Yisrael, led by Ofer Winter, falls below the threshold in all three final surveys, as does the Haredi Public party. The Reservists party clears the threshold in only one survey, with four seats. Each list that disappears below 3.25 percent redistributes seats to the survivors, and the final coalition math depends on which marginal lists live or die.
The distribution below the top two parties shows how crowded the field is. Together, the list co-led by former prime ministers Naftali Bennett and Yair Lapid, is projected at 14 to 15 seats. Yisrael Beiteinu holds eight. The Democrats, led by former general Yair Golan, are at eight to ten. On the right, Itamar Ben-Gvir's Otzma Yehudit is at eight, Bezalel Smotrich's Religious Zionism at six to eight, and the religious parties Shas and United Torah Judaism at seven to eight each. With the largest party at barely a fifth of the Knesset, the election is being decided by lists that hold less than a tenth of the seats.
A General's Political Gamble
Eisenkot's biography is the foundation of his campaign, and it cuts both ways. He is 66, served 41 years in the Israel Defense Forces, and was the military's chief of staff from 2015 to 2019. He entered the Knesset in November 2022, served in the war cabinet after October 7, and then resigned, saying the cabinet had "completely failed" on its objectives - returning the hostages, dismantling Hamas's ability to govern, and bringing evacuated residents back to the north.
His personal stake in the Gaza war is direct. His son Gal, a 25-year-old reservist and combat medic, was killed by an explosive device in northern Gaza in December 2023. Two of his nephews were also killed and a third was seriously wounded. That gives him a form of credibility on security that few challengers can claim - and it also exposes him to attack from a right wing that can argue a general who resigned from the war cabinet abandoned the fight.
He founded Yashar - "Straight! With Eisenkot" - in September 2025, after leaving Benny Gantz's National Unity alliance, which he criticized as dominated by its leader. The party positions itself as a centrist movement focused on integrity and national security. Its most senior recruit is Yoram Cohen, the former head of the Shin Bet internal security service, who joined in May 2026 and reinforced the party's security-first profile. Two former generals and a former spy chief on one ticket is a deliberate signal: the security establishment is running for civilian office.
On policy, Eisenkot has tried to draw a line between himself and Netanyahu without conceding the right flank. He has pledged to end Hamas rule in Gaza within 18 months, through a US-backed ceasefire framework or military and operational measures. On the West Bank, he has said he would reestablish Israeli control over civilian affairs, crack down on violent settlers, strengthen the Palestinian Authority, and tear down illegal outposts in areas under Palestinian civil administration - while leaving approved settlements in place. That is a harder line than the left would prefer and a softer one than Netanyahu's coalition partners will accept, which is precisely the center he is trying to occupy.
"I will make efforts to bring in more Zionist parties because Israel needs a broad coalition with a government that will bring a broad national consensus," Eisenkot told Channel 7 during the campaign.
The phrase "broad national consensus" is doing heavy lifting. It is an admission that his path to 61 seats runs through parties that are currently outside his bloc, and that he is preparing the ground for a unity government that could include figures from the center and even the right - but not, on his stated terms, the Arab parties or the far right that props up Netanyahu today.
What the Market Is Pricing - and What It Isn't
For investors, the question is not who wins the argument but who wins the shekel. The currency has been the most immediate transmission channel from politics to portfolios. The dollar traded at 3.106 shekels on October 23, down slightly on the day but weaker by 1.94 percent over the past month. Over twelve months the shekel is stronger by 5.54 percent, but the recent drift lower reflects the uncertainty of an election whose outcome cannot be modeled as a clean transfer of power.
The Bank of Israel kept its policy rate unchanged at 3.25 percent on October 21 and, in its accompanying forecast, laid out the economic backdrop against which the next government will govern. GDP from domestic activity is expected to grow 3.4 percent in 2026 and 5.1 percent in 2027. Inflation is projected at 1.5 percent by the end of 2026 and 2.1 percent in 2027. The trailing twelve-month budget deficit stood at 3.2 percent of GDP in September, below the government's target - helped by an interim budget that held civilian spending down and by tax revenues running above trend.
That fiscal position is the real constraint on whoever wins. The central bank forecast a deficit of 4.4 percent of GDP in 2026 and 4.6 percent in 2027, and it issued an explicit warning: raising the defense budget without offsetting adjustments would widen the deficit and could push inflation higher. Neither candidate has campaigned on cutting defense spending. The war has made defense a protected line item, and the bank's own forecast flags "particularly high uncertainty regarding the size of the defense budget."
The market implication is that an Eisenkot victory would likely bring a short-term relief rally in the shekel and Israeli bonds - a coalition-stability premium for a government seen as more predictable in its dealings with Washington and less prone to judicial confrontation - but it would not change the structural direction of the budget. The deficit stays wide. The risk premium, which the central bank notes has returned to levels similar to those before October 7, 2023, stays embedded. The second-order effect matters more than the headline result: a stable coalition tightens spreads; a hung parliament keeps the risk premium priced in regardless of who leads the negotiations.
Defense equities are the one corner of the market where the election outcome matters least. Elbit Systems, Israel's largest defense contractor, reported a record $32 billion backlog and second-quarter earnings per share of $4.14, ahead of the $3.68 consensus. Analysts project revenue of $11.8 billion and earnings of $1.1 billion by 2029, implying growth of about 11.5 percent a year from a 2026 base of $636 million. That order book was built across administrations and across Israeli governments; it is, in effect, policy-proofed. A change in prime minister would not unwind multi-year contracts with the United States and European customers, and the $2.3 billion eight-year program now in execution is insulated from the coalition arithmetic in Jerusalem.
The Counter-Thesis: Why the Right May Yet Hold
The strongest argument against an Eisenkot premiership is not that the polls are wrong, but that Israeli elections are not decided by the top of the ticket. The right-wing bloc around Likud has repeatedly outperformed its polling in the final days of a campaign, as undecided voters break toward the incumbent when the alternative is uncertain. Netanyahu has survived political obituaries before - corruption trials, protest movements, and previous elections - by consolidating a base that views any alternative as a threat.
There is also the question of who actually forms the government. Under Israel's system, the president consults party leaders after the vote and assigns the mandate to form a government to the candidate most likely to command 61 votes. That calculation includes parties that do not formally sit in either bloc, and it can produce a result that contradicts the headline seat count. If the far right consolidates around Likud and the religious parties hold their seats, Netanyahu could receive the first mandate despite trailing in the surveys. The 2026 vote is being fought in a parliament where the largest party is small by historical standards, and small parties hold disproportionate kingmaker power.
The counter-thesis has a specific test. If turnout in traditional Likud strongholds exceeds the final polling models and the far-right parties finish at the top of their ranges - Otzma Yehudit at eight seats, Religious Zionism at eight, Shas and United Torah Judaism at seven or eight each - then Netanyahu's bloc can reach the low 50s and, with defections from the opposition or Arab-party abstention on a confidence vote, remain in power. That is the scenario the incumbent's campaign is playing for, and it is not fanciful: Israeli polling has missed late right-wing consolidation before.
But the burden of that argument is heavy. Eisenkot's lead on prime-ministerial suitability is eight points, and his bloc's lead is consistent across three independent surveys. The more likely outcome is not a Netanyahu comeback but a prolonged negotiation in which neither bloc reaches 61 and the president must intervene - possibly resulting in a national-unity government that includes both camps, or a second election within a year. The election tells you who won the votes; it does not tell you who forms the government.
What Comes Next: Three Time Horizons
In the short term - the days and weeks after October 27 - the market will react to clarity, not to ideology. A decisive result either way is better for the shekel than a hung parliament. If Eisenkot emerges with a viable coalition path, expect a relief rally in the currency and a modest tightening of Israeli bond spreads. If the result is inconclusive, volatility will persist and the risk premium will stay elevated. The threshold to watch is the dollar's move: a break back below 3.05 would signal that investors are pricing in a stable transition; a push above 3.15 would signal the opposite.
Over the medium term - the first year of the next government - the binding constraint is fiscal, not political. Whoever governs inherits a deficit projected at 4.4 percent of GDP and a central bank that has already warned against unfunded defense spending. The Bank of Israel's forecast of a 3.0 percent average policy rate by the second quarter of 2027 assumes inflation converges toward the midpoint of its target range; a government that chooses guns without budget offsets will force that assumption to be rewritten, and with it the rate path. That is the trade-off the election does not resolve: both blocs want security, neither wants the deficit that pays for it, and the central bank is the only institution saying the numbers out loud.
Over the long term, the structural question is whether this election marks a regime shift in Israeli politics or a cyclical correction. The anti-Netanyahu sentiment is structural: it is rooted in the accountability debate after October 7 and is unlikely to reverse on its own. But the seat swings between blocs are cyclical - they will revert as coalitions form, fracture, and re-form in the Knesset's proportional-representation system. The durable change, if Eisenkot wins, is not the color of the government but the re-centering of the security establishment's role in civilian politics - a former chief of staff and a former Shin Bet chief at the top of the ticket is itself the signal.
The falsifying signal for the view that Eisenkot is the likely next prime minister is simple and quantifiable: if the final seat count puts the Netanyahu bloc at 54 or more with the far-right and religious parties all at or above their upper poll ranges, and Eisenkot's bloc fails to reach 52, the incumbent retains the initiative and the opposition lead evaporates. Watch the far-right seat totals on election night - they are the hinge.
Israel is voting for change, but not yet for a majority. The election will tell investors whether that change comes with a stable government and a firmer shekel, or with another round of coalition bargaining that keeps the risk premium priced in. Either way, the defense budget does not come down, and the market knows it.
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