Brazil's three-week rally ends as second-round election tightens

The three-week rally that transformed the Brazilian market after the first round has come to an end. The Ibovespa fell 1.15% on Thursday, closing at 204,120 points — well off the all-time peak of 206,000 points reached the day after the October 5 result, when Flávio Bolsonaro's (PL) lead triggered the exchange's biggest daily gain since March 2020, up 7.7%, with the index breaking through the 200,000-point barrier for the first time and the dollar sliding more than 4% against the real. Now, with the runoff set for Sunday and the race in a technical tie according to Datafolha, the same managers who profited most during the rally — BTG Pactual, Legacy, IP and Absolute — are taking profits and reducing risk exposure, according to Brazil Journal. "The strong asymmetry between risk and return that existed before the first round has diminished considerably," said Bruno Henriques, portfolio manager at BTG Pactual Asset Management.

What the market is pricing in goes well beyond a preference between candidates. It is a bet on the trajectory of gross debt that already hovers around 82% of GDP — the highest since the pandemic — and of a Selic rate that, held at historically elevated levels, has compressed household consumption growth from 5.1% in the fourth quarter of 2024 to just 0.9% in the second quarter of 2026, according to Ipea's Economic Outlook Report. GDP is expected to grow 2% or less in 2026, with a projected slowdown to 1.32% in 2027, according to the median of the Focus bulletin — a forecast that has been falling for three consecutive weeks. Valor Econômico openly raised the risk of stagnation in 2027, a scenario combining restrictive rates, record household delinquency — with 29.8% of income committed to debt — and a tax reform whose implementation keeps stumbling.

The post-first-round euphoria reflected a specific reading: that Flávio Bolsonaro, whose campaign signals fiscal adjustment and the possible appointment of Adolfo Sachsida to the Finance Ministry, would reduce the risk premium embedded in Brazilian assets. That thesis, however, has met significant pushback. A Nobel laureate in Economics interviewed by Folha de S.Paulo said the election of the PL candidate would represent economic risk in both the short and long term. At the same time, former Finance Minister Mailson da Nóbrega and the architect of the tax reform, Bernard Appy, told Valor Econômico that there is no way to avoid a fiscal adjustment in 2027, regardless of who wins. The convergence of diagnoses is telling: both sides of the spectrum acknowledge the fiscal urgency, but neither candidate has put forward sufficient proposals to stabilize public debt, in the view of economists such as Alessandra Ribeiro, of Tendências Consultoria. A group of 380 business leaders and executives coordinated by economist Roberto Giannetti da Fonseca went further still, writing an open letter to Lula and Flávio with a set of economic measures that, according to the group, would allow the Selic to drop to 7.5% by 2027.

Amid the political volatility, BTG Pactual estimates that the stock market could receive up to R$225 billion in foreign inflows in a base-case rate-cutting scenario. In the five most recent periods of strong foreign capital inflows, Petrobras, Vale and Prio accounted for nearly two-thirds of the resources, with the state-run oil company alone attracting roughly R$18 billion — nearly a third of the total. The Bradesco BBI survey of emerging-markets investors shows that the bank's proprietary "greed versus fear" index has reached its highest level of the year, with discounted valuations and room for rotation into more cyclical sectors.

The fiscal framework gains additional texture when one looks at this week's economic policy news flow. The Lula administration signed into law the forgiveness of tax debts of individual microentrepreneurs — a measure that benefits roughly 4 million entrepreneurs with debts estimated at R$15 billion — and extended the CNPJ and invoice waiver for nanoentrepreneurs through 2029. The Finance Ministry published the Desenrola 3.0 notice, with capacity to buy up to R$90 billion in debts of individuals and MEIs, potentially exceeding the combined total of the two previous programs. Experts warn that the initiative does not resolve the structural debt problem, but Deputy Minister Dario Durigan insisted that good-faith taxpayers will not be penalized in adapting to the tax reform. The Selective Tax, in turn, is expected to be postponed to 2028 — the so-called "sin tax" will arrive later than planned, regardless of the next occupant of the Palácio do Planalto.

In the productive sector, federal tax revenue hit a new record in September, driven by oil and sports betting ahead of the veto, but analysts identify signs of slowdown in the last quarter. Agribusiness presents its own internal contradiction: Gross Production Value is down 3% in 2026, to R$1.44 trillion, but soybeans and cattle are holding the sector up. Abiove projects an 0.8% decline in soybean exports in 2027, to 113 million tons, with record revenue driven by higher prices. A structurally worrying data point emerges from the CFO of Kepler Weber: the agricultural storage deficit has reached 40%, pressuring food inflation even in a year of record harvest. In poultry, Saudi Arabia suspended chicken imports from Santa Catarina after an outbreak of Newcastle disease — the country is the third-largest destination for Brazilian exporters — while the European Commission signaled in the same week the reinclusion of Brazil on the list of countries authorized to export chicken and honey to the bloc, developments that balance precariously for the sector.

Hitachi Energy announced a new industrial unit in Brazil, with US$77 million in investment for the manufacture of power transformers, bringing its total investment plan in the country to US$350 million — a sign of global appetite for electrical infrastructure in an era of accelerated expansion of data centers and artificial intelligence. Not coincidentally, U.S. Deputy Secretary of State Christopher Landau visited Itaipu this week to announce AI infrastructure and uranium exploration deals — but in Paraguay, where abundant energy and a more agile regulatory environment have become attractions that Brazil has not yet been able to replicate at the same speed.

In the coming week, the scenario will be dominated by a single event: the runoff result on Sunday. The market reaction on Monday will determine whether the October rally finds new momentum or turns into a correction. Regardless of the winner, the 2027 fiscal program will have to be presented in a context of weak growth, elevated interest rates and a tax reform in partial implementation — conditions that leave little margin for unfulfilled promises.