Markets brace for Brazil election, Trump volatility and AI hype | Markets

Brazil’s financial markets are beginning to adjust expectations for the 2026 presidential election, as investors try to gauge the political event’s impact on stocks, interest rates, and the exchange rate. Also on their radar are the threat of new U.S. trade tariffs under President Donald Trump and the possibility of a bubble forming in artificial intelligence investments.

“The presidential election in Brazil will affect asset prices, and there’s already a shift in expectations about who would be the most competitive candidate against Lula. But Trump’s renewed tariff threats toward Latin America are also in the air. And globally, markets are taking on a lot of risk, people are even talking about a new bubble forming,” said Ermínio Lucci, CEO of BGC Liquidez.

He spoke at the panel “Perspectives and Challenges for Brazil’s Macroeconomy,” during another edition of Caminhos do Brasil (Brazil’s Pathways), a debate series promoted by Valor Econômico, O Globo, and CBN radio, held October 14 in São Paulo as part of the CNC Global Voices event.

Sponsored by the Commerce System—via the National Confederation of Commerce (CNC), Sesc, Senac, and their federations—the event was moderated by journalists Alex Ribeiro (Valor) and Luciana Rodrigues (O Globo).

In Brazil, investors largely agree that the next administration must tackle the country’s fiscal challenges. A win by the opposition is seen as more likely to bring spending cuts, potentially opening the door for faster reductions in the Selic base interest rate, said Octávio Magalhães, chief investment officer at Guepardo Investimentos.

João Braga, founder of Encore Capital, said the current administration’s focus on boosting revenue rather than cutting spending “creates political fatigue and limits economic policy effectiveness.” Still, he remains optimistic for those with a long-term view. “Markets tend to overreact in the short term. But for long-term investors, this might be the best scenario imaginable.”

Mr. Braga pointed out that corporate earnings remain strong and economic growth has consistently surprised—due to both good and bad reasons—since 2019. Interest rates in Brazil are also expected to fall soon, following the trend already underway in the U.S.

He noted that for the past 17 years, U.S. investments were the default due to low interest rates, Mr. Trump’s earlier corporate tax cuts, and the technological boom, particularly in AI. Now, however, Mr. Trump’s second term is adding uncertainty with trade tariffs, and China is advancing quickly in AI development. That has prompted investors to diversify, seeking new destinations for capital, including Brazil.

Mr. Braga used an analogy to explain the global capital flow: “It’s what I call the Olympic pool theory. If you remove five buckets of water from it, the pool [the U.S. stock market] still looks the same. But if you pour them into a bathtub, Brazil, it makes a big splash. That’s already happened a bit this year.”

For the business environment in Brazil to improve further, Mr. Lucci of BGC said the country needs to continue advancing reforms. He argued that the 2023 tax reform, whose effects begin in 2026, helps simplify processes, but further steps are needed.

“It starts with administrative reform. The Brazilian state is large and expensive. And many advances from the labor reform are being rolled back. Hiring under CLT [Brazil’s labor law framework] remains costly, and this discussion must resume,” Mr. Lucci said.

Investors have also begun discussing the risk of a speculative bubble in AI.

“But with AI, not even the CEOs and founders of these companies know if their assets are overvalued or undervalued, what their actual scale is, or where the companies will go,” said Mr. Magalhães of Guepardo. “Calling it a bubble is risky, because these companies may deliver the results the market expects and continue growing. I can’t evaluate that, which is why I don’t invest in AI. I don’t know if it’s a bubble or not.”

Mr. Lucci added that while the risk of an AI bubble is still uncertain, geopolitical risk has clearly increased in recent years. “There’s the unpredictability of Trump’s actions. His way of operating creates uncertainty, whether it’s imposing tariffs or threatening to intervene in the Federal Reserve. That kind of geopolitical risk is very hard to price.”

This global environment of uncertainty could, paradoxically, increase Brazil’s resilience due to the country’s more closed economy, Mr. Lucci said. But Mr. Magalhães cautioned that Brazil remains heavily dependent on commodity exports to China.

“Our problem is China. If China stops buying from us, Brazil and its commodities will suffer. The U.S. wouldn’t hurt us as much,” said Mr. Magalhães.

José Roberto Tadros, president of the CNC-Sesc-Senac System, highlighted the importance of bringing together financial market experts at the Caminhos do Brasil debate within CNC Global Voices.

“We reinforce the importance of discussing topics such as interest rates, exchange rate, reforms, and the business environment in depth,” he said. “The CNC-Sesc-Senac System believes that Brazil’s sustainable development depends on a stable and predictable economic environment that can attract investment and generate jobs.”