No credible fiscal sign, pessimism with Selic and GDP will continue to punish cyclical actions

The headline reports that the absence of a credible fiscal signal, combined with pessimism around the Selic policy rate and Brazil's GDP outlook, is expected to keep weighing on cyclical equities. The transmission channel runs through the rate and growth expectations that drive equity valuations: a high Selic keeps the discount rate elevated and raises the opportunity cost of holding risk assets, while weak growth projections compress earnings forecasts for companies tied to domestic demand. Cyclical sectors such as retail, construction, consumer discretionary and industrials are typically the most exposed, since their revenues track economic activity and their valuations are most sensitive to shifts in rate expectations. Fiscal credibility also feeds into this through the term premium and the Brazilian real, so the perceived lack of a clear fiscal anchor can push long-end yields higher and reinforce the pressure on rate-sensitive names. Traders should watch the next IPCA inflation print and the Copom communiqué, as any shift in the Selic path would directly test whether current pessimism is already priced into cyclical stocks.

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