Why did the stock market rise as a suppression in GDP knocked Brazil out of the group of ten largest economies?

Even with data indicating a slowdown in economic activity in the country, the Sao Paulo B3 Stock Exchange recorded a new record yesterday. It is the 31st day of the year. Since January, the Ibovespa, B3’s main index, has gained 36%. The index ended yesterday’s session at an increase of 1.68%, at 164,468 points, which is the highest in the historical series.

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The new cap, according to analysts, was motivated by the possibility of an interest rate cut in Brazil soon, in investors’ interpretation. The movement was accelerated by third-quarter GDP data, released on Thursday, which showed a loss of momentum in economic activity due to the restricted key interest rate (Selic), currently at 15% per annum.

Brazil ends the year outside the group of the ten largest economies in the world. After Russia overtakes it, the country will fall to 11th place in the rankings, according to IMF forecasts contained in a report by risk rating agency Austin Ratings.

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The loss of positions was already expected before the data was published, and the calculations take into account the performance of GDP and the trend in countries’ exchange rates. The strengthening of the ruble strengthened Russia. In the IMF’s long-term forecasts, Brazil will remain in 11th place until 2030.

The logic that explains the rise in the stock market in this context is that lower economic activity represents less inflationary risk, leaving room for the central bank to lower interest rates, its main weapon against price control.

Lower interest rates tend to improve the results of listed companies and increase investor interest in stocks, which contributes to their appreciation in value, given the potential for more modest gains in fixed income securities, such as those linked to Selic.

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– Lowering the interest rate has many effects on the stock market. The first, and most direct, is that the stock market makes a profit. It is normal for companies to suffer from debt. If there are no spending cuts over the next 12 months, and it maintains what revenue it generates today, the simple fact of cutting interest rates means it has lower debt costs, leaving more money to invest, less leverage, and more money to distribute to shareholders – says Felipe Villegas, equity strategist at Genial Investimentos.

GDP was expected to be suppressed

Given British Columbia’s restrictive interest rate policy, a slowdown in GDP was already expected – financial market analysts forecast growth of 0.2%, according to research by Valor. To contain inflation, the Bank of Colombia raised the base interest rate (CILIC) between September 2024 and last June, from 10.5% annually to 15% annually, the highest level in nearly 20 years, at which it has remained since then.

As a result, although unemployment rates fell to successive record lows, household consumption increased by only 0.1% compared to the second quarter. During the same period in 2024, the increase of 0.4% was lower than in the second quarter (1.8%) and the first (2.2%). This was the worst performance since 2021 in this comparison.

“Conflationary monetary policy is definitely contributing to this brake,” said Claudia Dionisio, an analyst at IBGE. The Finance Ministry assessed, in a note, that “the consumption slowdown is linked to the slowdown in labor and credit markets in the third quarter, in response to the lagged effects” of interest rates.

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The analyst says the temperature rise is behind us

According to Braulio Borges, an economist at consultancy LCA and associate researcher at the Brazilian Institute of Economics at FGV Ibre, the movement was strengthened by a decline in government spending, in total across the board, in the first half of the year, which helped to cool the economy.

The good news is that we have been pointing out for some time that the economy was overheating, i.e. GDP was growing slightly above its potential. In this case, activity puts pressure on inflation and generates a deterioration in external accounts. That has changed. Borges said: In the third quarter, in my estimates, the economy is no longer in this overheated situation.

The question now is when the cooling will be enough for interest rates to start falling. For Borges, it may be time, but a series of factors could serve to revive demand throughout 2026 – an expansion of income tax relief for those earning up to R$5,000 a month and the willingness of state governments to spend more in a general election year. This may limit the Selec cutting cycle, which is expected to begin in January or March.

Selek is not going down any time soon

According to former BC manager Jose Julio Sena, the slowdown in the third quarter will not change the next decisions regarding Celek. The most important variable is inflation expectations, in the monetary authority’s models, for about a year and a half from now, which is the so-called “appropriate horizon” for interest policy, which takes into account the time it takes for silicon movements to affect the economy.

The forecast combines economic activity, commodity prices, exchange rates, inflation expectations, everything,” said Sina, who is head of the Center for Monetary Studies at FGV Ibre and a consultant at 4intelligence.

When considering the downward path of the base rate until the end of 2026, the model still suggests inflation above the target of 3% per year, according to central bank data. In the scenario where Selik remains as is, inflation falls to the target, according to 4intelligence calculations, which is a step to start cutting, but “you must have a high degree of confidence that it will be possible to maintain this situation,” Sina considered:

– It may make more sense to wait for an interest rate cut in March, if the situation remains favorable, taking into account what lies ahead to revive demand.

The loss of momentum in consumption caused a slowdown in domestic demand as a whole, despite positive results for investments (up 0.9% compared to the second quarter) and government consumption (up 1.3%). According to the IBGE Institute, the economic slowdown was not greater only because external demand supported it.

Despite tariffs imposed by the United States on Brazilian exports, foreign sales of goods and services rose 3.3% in the third quarter. In contrast, imports increased by 0.3% – the more exports outperform imports, the positive the contribution of external demand to GDP.

According to Rebecca Bales, national accounts coordinator at IBGE, the impact of the tariffs was small because exporters redirected their sales to other countries and China increased its purchases of raw materials, such as soybeans and oil.

Agricultural and extractive industries are prominent

External demand was reflected in the sector’s performance from a production perspective. Overall, agriculture grew by 0.4% compared to the second quarter, industry advanced by 0.8%, and services remained practically stable, with a variance of 0.1% – in response to weak household demand.

The most notable positive points were two sectors focusing on exports, agriculture and extractive industries, which include oil, gas and mineral production. According to IBGE, the two sectors were responsible for more than half of the 1.8% growth in overall GDP compared to the third quarter of 2024.

Agriculture jumped 10.1% during the third quarter of 2024. The extractive industry jumped 11.9% compared to the previous year.

Will the stock market continue to rise?

With the Brazilian economy slowing and opening the way for monetary policy easing in British Columbia, the bullish movement in the stock market should continue, according to the assessment of US bank JP Morgan. The bank believes in a report that Ibovespa is capable of reaching 230,000 points by the end of next year in the face of the so-called “bull market,” that is, if “positive expectations” are achieved.

For the US bank, “there was an increase in discussions about electoral prospects, while inflation stabilized, leading to a downward repricing of interest rate expectations,” says an excerpt.

In addition to flexibility, JP Morgan points out that positive factors include the possibility of political changes that “allow for structural reforms leading to further growth,” as well as the “diversification of allocation” of foreign investors that should accelerate, “driven by a structurally optimistic outlook for emerging markets.”

JPMorgan’s estimate represents a 40% increase from the 164,000 points the index reached on Thursday.

What are index points?

Ibovespa is the main thermometer of the average performance of the most actively traded and most representative stocks on the stock exchange. The index consists of a hypothetical portfolio of 84 stocks from 81 Brazilian companies.

However, they are represented by a certain weight, and the participation in the composition varies depending on their trading representation on the Brazilian Stock Exchange. In this group are stocks of companies in the financial sector, retailers, beverages, food and commodities (such as mining and oil companies).

When the IBOVESPA index rises, it means that the companies that make up the index are increasing in value, attracting investor interest. This estimate is measured in points, where each point is equivalent to 1 Brazilian Real. B3 performs calculations to understand the value of the sum of that portfolio of stocks, which becomes the value of the index.