“The third quarter likely marked the bottom for earnings comparisons, and now we’re starting to see that bottom line accelerate,” said Daniel Gewehr, chief strategist at Itaú BBA. The bank estimates that, excluding the commodity sector, companies listed on the Ibovespa will post 5% annual growth in net income.

Still, macroeconomic conditions remain a drag. A proprietary activity indicator from Itaú BBA points to a 0.3% contraction in GDP during the fourth quarter, led by the services sector. “It’s still a challenging macro and interest rate environment, but companies are managing to deliver solid operating performance,” Gewehr noted.

XP Investimentos shares a similar view of a “slightly positive” quarter, driven more by efficiency gains than revenue expansion. For the firms under its coverage, XP projects modest 1.4% revenue growth in the fourth quarter but a robust 12.8% increase in operating profit.

“Companies have low leverage and strong cash generation, and many paid record dividends,” said Fernando Ferreira, XP’s chief strategist, noting that retail and consumer companies are more vulnerable to the economic slowdown and the still-high benchmark interest rate of 15%.

“If I had to sum it up, I’d say this will be a season of divergent results,” said Ricardo Peretti, equity strategist at Santander Brasil. “That’s a sign that companies are still operating efficiently. The results are coming less from revenue growth and more from cost reductions.”

Santander forecasts a 3% drop in aggregate net revenue and a 19% decline in total net income for companies under its coverage, driven by tough comparisons and volatility in the commodity sector. But domestic-oriented sectors paint a better picture, with the bank expecting a 12% rise in EBITDA and 4% growth in net profit.

Analysts expect a wide dispersion of results across sectors. There is broad consensus that low-income housing construction, utilities (energy and sanitation), and telecommunications will be among the top performers this earnings season.

On the downside, retail continues to suffer from high interest rates and the migration to e-commerce. Bank of America warned that the fourth quarter looks “challenging” for most retail names, with online competition, adverse weather, and aggressive pricing by e-commerce players weighing on physical stores.

Steelmakers are also likely to post weak results. Both XP and Santander flagged companies like Usiminas and CSN as underperformers due to seasonal weakness and lower domestic prices.

Mining, however—especially Vale—is expected to fare better thanks to iron ore prices holding above $100 per tonne and a rebound in copper.

Monetary easing

Beyond fourth-quarter results, markets will focus on guidance for 2026. The expected start of Brazil’s monetary easing cycle at the March meeting of the Central Bank’s Monetary Policy Committee (COPOM) is a key trigger for the stock market.

“The ideal scenario would be a ‘not too hot, not too cold’ environment, allowing for rate cuts without hitting corporate results too hard,” said Julia Nogueira, vice president of equity research at Morgan Stanley.

“Companies will highlight positive tailwinds like tame inflation and rate cuts, but they’ll also acknowledge uncertainties tied to the elections in the second half,” said Peretti of Santander. “Many will likely frontload deals into the coming months. I believe telecom firms will strike a more cautious tone rather than express full-blown optimism.”

Looking ahead to 2026, Gewehr of Itaú BBA forecasts a 20% increase in profits, driven by lower interest rates, continued GDP resilience, and stable corporate balance sheets.

XP is even more bullish, projecting 23% profit growth next year, driven by a decline in financial expenses. “Operationally, it won’t be a very strong year, but earnings should rise sharply due to the impact of lower rates on financial results,” Ferreira said.

Despite the optimism, earnings-related stock volatility could remain high, just as in recent quarters. Analysts noted that the record foreign capital inflow of R$26.3 billion could amplify such swings.

“We saw an increase in quantitative foreign funds raising their exposure to Brazilian stocks,” Ferreira said. “They tend to focus less on company fundamentals and more on whether earnings beat or missed expectations, which adds to volatility.”

Gewehr said international investors are still upbeat, attracted by global diversification and cheap valuations in Brazil in dollar terms, while domestic investors remain cautious. “The farther away geographically, the more attractive the valuation looks,” he joked, adding that emerging market investors no longer see Brazilian equities as deeply discounted.

*By Felipe Laurence — São Paulo

Source: Valor International

https://valorinternational.globo.com/