What Happened in the First Round of the 2026 Election?
Flávio Bolsonaro (PL) finished the first round with 47.09% of valid votes, pulling ahead of Luiz Inácio Lula da Silva (PT), who secured 45.09%. The outcome confirms an October 25 runoff. With 99.73% of polling stations tallied by Brazil's electoral authority, the Tribunal Superior Eleitoral, the result is locked in. The remaining candidates finished far behind: Augusto Cury (Avante) took 2.89%, Renan Santos (Partido Missão) 2.25%, and Ronaldo Caiado (PSD) 2.19%.
The result came as a surprise on two fronts. Most polls showed Lula leading numerically heading into the final stretch of the campaign, and a two-percentage-point margin exceeded any public survey published before election day. President Lula acknowledged the setback in a post-election address: "Election results are often unexpected. I must confess I was convinced we would win in the first round," he stated. Both campaigns return to the trail this Monday with an intense focus on courting voters from the opposing camp.
Why the Market Rallied—and What It Says About Fiscal Risk
Investors read the result straightforwardly: Flávio Bolsonaro leading by nearly two points reduces the perceived probability of the current fiscal trajectory continuing. Walter Maciel, CEO of AZ Quest, summarized the view during a Market Makers livestream: "The market is pricing in confidence that the right will pursue deeper primary balance adjustments and steer public debt onto a downward path." Maciel had anticipated the Ibovespa opening up as much as 10% on Monday.
Late Sunday, the EWZ—the primary exchange-traded fund for Brazilian equities in New York—surged more than 7%. While that does not guarantee the Ibovespa will match that exact proportion locally, it highlights the scale of relief institutional investors have already priced in. The index closed Monday up 2.63% at 192,114.55 points. Leonardo Mendes of Manchester Investimentos said he expects the political landscape to push the index above 200,000 points, with the impact concentrated in state-controlled companies alongside a relief rally in the intermediate and long ends of the yield curve. Specifically, the DI interbank rate contract for January 2031 pulled back toward 13.5%.
What the First Round Doesn't Solve: Leading in October is not a victory on the 25th. With a 47% to 45% split, the country is divided down the middle, and in a head-to-head runoff, voter migration remains unpredictable. Uncertainty persists, and the market will reprice with every poll published over the next three weeks.
What Changes for the U.S. Dollar Through October 25
The dollar continues to serve as an attractive defensive hedge, and the first-round results reinforce that thesis without closing the book on it. Close polling numbers and lingering ambiguity regarding the next administration's fiscal framework mean the risk premium will not vanish from a single vote count. Foreign exchange trading is expected to remain volatile over the next three weeks, with every runoff poll, economic policy statement, and signal of voter migration parsed by the market.
Walter Maciel made a crucial distinction: "Brazil is in a strong position in terms of macroeconomic fundamentals." The question is not the country's growth capacity, but the incoming administration's willingness to place debt on a sustainable trajectory. Until that question is answered, holding the dollar as a portfolio hedge makes sense regardless of who wins the runoff.
What Analysts Expect for State-Controlled Stocks
Leonardo Mendes of Manchester Investimentos pointed to a specific effect extending beyond the broader index: shares of state-owned enterprises tend to react more sharply to political shifts. The expectation of management more committed to fiscal reforms reduces the risk of political interference in public companies—a factor that weighed heavily on stocks like Petrobras and Banco de Brasil in recent years.
A necessary caveat applies: this reasoning is short-term and built on expectations rather than consummated facts. The market already priced in part of this favorable scenario during Monday's rally. Buying state-controlled equities after a 7% ADR jump in New York means paying the price established by early movers, which is rarely a sound strategy. Existing holders should maintain their positions; sidelined investors should wait for a clearer entry point.
Why the First Round Defied the Polls
Maciel's analysis at AZ Quest highlighted a pattern confirmed by the numbers: centrist candidates lost ground. "Those who sat on the fence took a beating," he noted. Caiado (PSD) managed just 2.19%, well below his peak in earlier polls. The vote distribution suggests the centrist electorate chose between the two main platforms in the first round, squeezing out alternative choices.
The analyst also pointed to topics that weakened Lula's standing: "From day one, he avoided discussing public safety and corruption, and he has also sidestepped the economy." The next three weeks of campaigning will center squarely on those issues as the race narrows to two candidates, and asset volatility will track every shift in voting intentions.
What to Watch Ahead of October 25
Three key indicators for investors with exposure to Brazil:
- Runoff Polls: Any widening or narrowing of the margin between Bolsonaro and Lula will move the market. With a two-point spread in the first round, the outcome remains genuinely uncertain.
- Long Yield Curve: A DI rate for 2031 pulling closer to 13.5% would signal that the market is pricing in fiscal adjustments from the next government. This barometer is more useful than monitoring daily swings in the Ibovespa.
- EWZ on U.S. Exchanges: The Brazil equity fund traded in New York operates outside B3 trading hours and offers a read on foreign investor sentiment ahead of the local open.
Our portfolio stance remains unchanged following the first-round results. The IBOV stays at a neutral weight; the relief rally arrived, but corporate profit fundamentals did not change overnight on a Sunday. The dollar remains a strong defensive hold because fiscal uncertainty does not end with a single election count. The decisive answer comes on October 25.
