Goldman Sachs: Brazil stocks slump after election; emerging-market third-quarter earnings expectations revised down

How steep was the post-election decline in Brazil?

In the reporting week, the MSCI Emerging Markets Index fell 1%; South Korea rose 5%, while Brazil fell 23% after the second-round election results were announced, making it the worst-performing market.
On the first trading day after the election, Brazil’s BOVESPA index fell about 20% at one point intraday and closed down about 13%; it continued to decline thereafter. By the time the report was published, it had fallen about 18% cumulatively from the previous Friday’s close before the election.
Rate-sensitive stocks and small caps were hit hardest, with the relevant indexes falling 38% and 32%, respectively; materials and telecommunications stocks held up relatively well.

Goldman Sachs says the post-election decline in the BOVESPA index exceeded the move implied by its macro model. Even after accounting for the gains following the first round of the election, rate-sensitive sectors such as financials and utilities still significantly underperformed the level implied by the change in five-year interest rates.
Valuations in some sectors are now close to, or below, their median levels over the past decade when Brazil’s ten-year government bond yields were above 14%. For example, the financial sector’s forward price-to-earnings ratio for the next 12 months is 8.4 times, below the 8.9 times seen during periods of high yields; telecommunications is at 10.3 times, below 12.7 times.
Goldman Sachs notes that expectations for Brazil’s MSCI 2027 earnings per share have not yet been revised down significantly, but could be. The firm believes that selling pressure from recent foreign outflows and net redemptions from Brazil ETFs may persist, and that key cabinet appointments and fiscal policy are important points to watch.

About 475 MSCI Emerging Markets constituents have reported third-quarter results, representing about 41% of the number of constituents and half of their market capitalization. According to Goldman Sachs’ tracking, third-quarter year-over-year earnings-per-share growth was 56%, below the 72% expected at the start of earnings season; the median earnings surprise was negative 1%.
Revenue performance was better than earnings performance: 34% of companies beat revenue expectations, while 24% fell short; only 33% beat earnings expectations, while 45% fell short. Goldman Sachs concludes that margin pressure may be widespread.
Negative earnings surprises and downward revisions to expectations were more pronounced in North Asia and China, while India and the Middle East and North Africa were relatively resilient. By sector, technology earnings were weak, while utilities and real estate were stronger.

In the reporting week, emerging-market equities recorded net foreign outflows of 5.4 billion dollars, including outflows of 5.2 billion dollars from Taiwan; India, meanwhile, saw inflows of 1.2 billion dollars. At the same time, global emerging-market equity funds recorded cumulative inflows of 71 billion dollars year to date, but also saw outflows in recent weeks; these figures use different capital-flow measurement methods.
Goldman Sachs continues to emphasize diversified allocations and maintains overweight positions in Taiwan, South Korea, Brazil, South Africa, Greece and Hungary. By sector, it is overweight technology hardware and semiconductors, banks, capital goods, and metals and mining.
The firm also observed that in October emerging-market AI-related stocks and information technology stocks fell notably, while the equal-weighted emerging-market index outperformed the market-cap-weighted index. There were signs that the market rally was broadening, but overall market breadth remained below historical levels.