Lula Victory Sends Brazilian Stocks and Europe Shares Lower

Brazilian financial markets tumbled after Luiz Inácio Lula da Silva defeated Flávio Bolsonaro in Sunday's presidential runoff, delivering an unprecedented fourth term to the left-wing leader and unsettling investors who had expected a more business-friendly administration. The result also weighed on European companies with substantial Brazilian operations as concerns over government spending and public debt intensified.

According to Brazil's Superior Electoral Court, Lula secured 51.8% of valid votes, compared with 48.2% for Bolsonaro, with nearly all ballots counted on Sunday, October 25, 2026. The outcome marked the first time since Brazil restored direct presidential elections in 1989 that a candidate won the runoff after losing the first round.

The iShares MSCI Brazil ETF fell more than 27% in premarket trading on Monday, according to the reports, putting the fund on course for its steepest single-day decline since at least 2000. In earlier premarket trading, the fund was down 25% at 7:25 a.m. ET, according to CNBC.

U.S.-listed Brazilian companies also recorded substantial declines. Petrobras fell 24%, Itaú Unibanco dropped 26%, Ambev lost 13%, Vale declined 3.3%, and aircraft manufacturer Embraer slipped 2.6%, according to CNBC.

European companies with significant Brazilian exposure also weakened. Santander shares fell nearly 4% in early trading, while Telefonica declined 7.2% and AB InBev lost 3.5%. Spain's IBEX 35 fell 0.3%, and Portugal's PSI 20 dropped 0.7%, even as other European equity indexes advanced, according to Yahoo Finance.

Investors had largely anticipated a Bolsonaro victory following his lead in the first round earlier in October. His campaign's promises of fiscal consolidation, privatization, and pro-business reforms had supported expectations for Brazilian assets, making Lula's win a significant surprise for markets.

Benjamin Toms of RBC Capital Markets described investor perceptions of the incoming administration and the potential political consequences of the result.

"Lula is perceived as the less market friendly candidate due to fiscal indiscipline," said Benjamin Toms of RBC Capital Markets.

Toms also warned that the election outcome could lead to unrest across Brazil. Bolsonaro challenged the result and said he would seek its annulment, according to Reuters.

Bolsonaro also objected to a Supreme Court decision extending voting hours by two hours. He called the ruling "unacceptable," according to Reuters.

The voting process faced allegations of voter suppression after Lula's campaign reported that public transportation had been suspended in some areas. Supreme Court Justice Cristiano Zanin extended voting by two hours, while Bolsonaro's campaign had also requested additional time, citing heavy rain that closed polling stations in southern Brazil.

The political transition also carries implications for Brazil's international relationships. Lula's victory blocks a rightward political shift in Latin America that U.S. President Donald Trump had supported, while Lula has publicly clashed with Trump over policy matters.

Trump had praised Bolsonaro's first-round performance, calling his lead "a very, very big victory." Lula is scheduled to govern from 2027 through 2030, facing a Congress in which Bolsonaro's Liberal Party holds its largest parliamentary bloc in decades.

Brazil's fiscal position presents another challenge for the incoming administration. Gross public debt reached 82.9% of gross domestic product in August, its highest level since March 2021, according to the Central Bank of Brazil. Double-digit interest rates, rising debt-servicing costs, and mandatory spending commitments have contributed to mounting pressure on public finances.

Alejo Czerwonko of the Atlantic Council said Lula would need to persuade investors that Brazil could place its debt trajectory on a more sustainable path. He expects the administration to continue a "gradual approach," maintaining the existing fiscal framework while seeking to protect public investment and social spending.

Goldman Sachs analysts anticipate "modest measures" to restrain government spending growth, alongside further increases in an already high tax burden. The analysts consider major structural reforms unlikely under the incoming administration.

European companies face distinct risks from their exposure to Brazil's economy. Santander generated approximately 15% of its 2025 earnings in Brazil, recording pretax profit of 3.22 billion euros ($3.61 billion). Its position as one of the country's largest private lenders leaves its performance sensitive to consumer credit conditions and domestic interest rates.

Telefonica's Brazilian business, which operates under the Vivo brand, generated 9.45 billion euros in revenue in 2025, accounting for 28% of the company's total revenue. AB InBev's exposure comes through its majority stake in Ambev, a leading Brazilian brewer.

Regional leaders also responded to the election result. Peruvian President Keiko Fujimori described the vote as a "democratic day" for the Brazilian people in a post on X late Sunday, while Uruguay President Yamandú Orsi congratulated Lula during a phone call and referred to him as a friend.