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In Sunday’s close runoff election, Brazil’s incumbent president, Luiz Inácio Lula da Silva, defeated Flávio Bolsonaro, winning about 52% of the vote.
The problem? The election didn’t go as investors expected.
Bolsonaro had edged Lula in the first round three weeks ago, and the final polls showed him holding a narrow lead. Investors piled in. The iShares MSCI Brazil ETF (EWZ) jumped 12.5% the day after the first-round vote, its best day since March 2020. Over the next three weeks it took in $4.1 billion of new money, nearly 30% of the fund’s total assets.
Those investors were betting that a Bolsonaro presidency would favor business, rein in government spending, and pave the way for lower interest rates.
Instead, they got Lula.
And he faces a tough road ahead. Lula will need to address Brazil’s public debt, which has risen above 82% of GDP, the highest level in five years, and interest payments alone now consume more than 8% of the nation’s economic output. Bolsonaro’s Liberal Party emerged from this month’s voting as the largest party in both houses of Congress.
Investors fear that government spending and debt will stay high. That would keep interest rates elevated and make borrowing more expensive for businesses and consumers alike.
As a result, Brazil’s stock market is taking a big hit today as investors unwind their bets on a Bolsonaro victory:
- The iShares MSCI Brazil ETF (EWZ), which tracks Brazilian stocks, plunged as much as 27% in premarket trading and is still down about 20% this afternoon. If that loss holds through the close, only one day in the fund’s 26-year history will have been worse: March 16, 2020, when it fell 23.1%.
- Nu Holdings Ltd. (NU), one of the world’s largest digital banks and Latin America’s largest fintech, has fallen about 18%. Investors worry about tax increases and tighter regulation of Brazilian financial companies. The old-line banks are faring even worse. Itaú Unibanco (ITUB) and Banco Bradesco (BBD) each dropped more than 26% in premarket trading.
- Petróleo Brasileiro S.A. (PBR) is faring slightly better, but still down 14%. Because the Brazilian government controls the oil company, investors worry that political decisions could affect its prices, taxes, and dividends.
- MercadoLibre Inc. (MELI), the largest online commerce and technology company in Latin America, is down 9%.
I recommended PBR just last week, so this morning stings. But I consider the selloff a buying opportunity. Petrobras remains an exceptionally strong oil company with an exceptionally strong growth profile. Furthermore, it sells oil priced in dollars, and a weaker real fattens those dollar revenues once the company converts them into reais.
While everyone wonders about what happens next, I want you to consider a broader lesson the Brazilian election offers: Loaded political terms like “socialist” and “populist” can sometimes distort political realities.
Lula’s critics apply both labels to him, and they have a point. But when it counts, Lula has also chosen pragmatism over ideology.
We’ve seen this movie before. In October 2002, Brazilian markets collapsed on fears that Lula would win his first presidential election, and the real sank to record lows. Then Lula installed an orthodox finance team, and investors spent the next several years unwinding their “Lula discount.”
His naysayers would probably be shocked to learn that the Bovespa Index soared nearly 1,200% in U.S.-dollar terms during Lula’s first two terms, from 2003 through 2010. To be fair, Lula had help. A global commodity boom lifted Brazil’s economy, and the real roughly doubled against the dollar. Brazilian stocks have also produced a positive return during his current term, even after today’s selloff.
By contrast, the Bovespa lost about 7% in dollar terms during the four years of Lula’s “business-friendly” predecessor, Jair Bolsonaro, father of the Bolsonaro who lost on Sunday. The pandemic deserves some of the blame for that.
Markets often fixate on narratives over substance. I believe today’s selloff is an overreaction and a buying opportunity.
To be sure, today would have been a lot more fun for holders of Brazilian stocks if Bolsonaro had won. But next year might not have been. Lula is a populist, but he is also a pragmatist. Center-right parties will control roughly 57% of the lower house and 62% of the Senate. That congressional map cuts both ways: it could stall the spending reforms investors want, but it also puts a firm ceiling on any populist adventures. I expect to see a lot more of the pragmatic Lula over the next four years than the populist one.
The stock market doesn’t react to whether news is good or bad. It reacts to the gap between what happens and what investors expected. A portfolio built around one anticipated outcome can unravel in a single session when that outcome never arrives.
A similar risk looms over the U.S. market as investors look ahead to next week’s midterm elections. Political shifts can change investor sentiment, but the bigger danger lies in overcommitting to one popular market narrative.
The good news is that best investment opportunities may emerge when expectations collide with reality.
And there may be a big opportunity taking shape in the AI market ahead of America’s midterms.
I’ll share what this all means below. But first, let’s take a look back at what we covered here at Smart Money last week…
Smart Money Roundup
October 21, 2026
Stop Looking at Who Builds AI – Look at Who Puts It to Work
Here’s one of the great, underappreciated lessons of investing in a technological revolution: The companies that build the infrastructure aren’t usually the ones that make the most money from it. Sometimes, the biggest winners are the businesses that put that infrastructure to work. I’ll explain how financial pressures are threatening today’s AI giants, and where investors might find the next generation of winners.
October 22, 2026
As the Market’s Party Shrinks, Here’s One Stock to Buy
I like to compare the stock market to a cocktail party. A healthy party has people mingling, laughing, and generally enjoying themselves. But when a handful of guests are laughing in the corner while most of the room is plotting an escape, the festivities have taken an unpleasant turn.
Lately, that’s been the stock market. So, I’ll show you why this market deserves caution – and give you the name of an overlooked healthcare stock that I believe offers substantial upside, even if the market’s party keeps shrinking.
October 24, 2026
As the AI Buildout Slows Down, Here’s What to Do Next
Would-be data center builders face a growing list of obstacles and expenses: New projects will take longer, face continuous permitting roadblocks, and incur rising costs. And in an industry committing hundreds of billions of dollars to infrastructure and running on borrowed money, time is expensive. So, here’s how to position your portfolio for the next phase of the AI trade.
October 25, 2026
Anthropic Could Be the Next Amazon, and That’s the Problem
There’s a lesson from the dot-com boom that most investors have forgotten: Even when you correctly identify the next revolutionary company, the price you pay can make it a terrible investment. I’ll show you why even the next Amazon might be a lousy investment at Anthropic’s rumored valuation, and where I’d look for better opportunities as AI reshapes the market.
The Election That Could Shake Up AI
The Brazilian election is a reminder of how quickly market expectations can change – and how that can create opportunities for investors willing to look beyond the headlines. Now, a similar shake-up could be coming to the U.S. market…
And AI could be at the center of it.
The morning after the midterm elections could mark the beginning of a major shift in the AI market. Some of America’s biggest technology stocks could plunge, while a different group of overlooked companies takes off.
And it has to do with what happens the week before the election.
Microsoft Corp. (MSFT), Alphabet Inc. (GOOGL), Meta Platforms Inc. (META), and Amazon.com Inc. (AMZN) are all expected to report earnings. I expect them to raise their spending plans for 2027, because that’s what they have done nearly every quarter for the past two years. By the end of the week, the four tech giants could be planning to spend about $1.3 trillion.
Then, America votes.
Thirty-six states will elect governors, and most state legislatures and thousands of local officials are up for election. Nine states will also choose utility regulators who help determine who pays for power.
So, the morning after the election, Wall Street could face $1.3 trillion in planned AI spending – and a new wave of elected officials pushing AI companies to shoulder more of the costs.
That could put pressure on the companies building the AI boom, just as investors are questioning how much those investments will pay off. And if the AI trade turns, you’ll want to know which stocks could fall – and which could rise.
In my free, special presentation, I’ll show you what to watch ahead of the midterms, and where I believe the next AI opportunities could emerge.
Remember: When the crowd bets on one outcome, the biggest opportunities can emerge when reality takes a different turn.
My publisher is taking this presentation down midnight tomorrow. So this may be your final opportunity to click here in order to learn how to position your portfolio for what comes next.
Regards,
