Key Highlights

● StoneCo surged with no company-specific news, as US-listed Brazilian shares caught fire after Sunday's election.

● The stock trades at about 3.6 times trailing earnings, a figure that drew attention as sentiment toward Brazil shifted.

● Brazil's Ibovespa closed at a record 206,911.89, its first close above 200,000.

Brazilian payments firm StoneCo surged on Monday as investors piled into anything tied to Brazil after a first-round presidential vote that markets read as a turn toward reform.

Brazil's vote lit the fuse

StoneCo (NASDAQ:STNE) surged on Monday, Oct. 5, one of the standout gainers on the Nasdaq Composite as US-listed Brazilian shares caught fire. Reports differed on exactly how far the jump ran, but every account showed a big move.

The trigger came from Brasília, not from the company. In Sunday's first-round presidential election, right-wing Senator Flávio Bolsonaro finished narrowly ahead of President Luiz Inácio Lula da Silva, forcing a runoff on Oct. 25. Investors took the result as a sign that fiscal tightening and pro-market reform could be on the way.

No company-specific announcement from StoneCo was found to explain the move. This was a country trade, and StoneCo was one of its loudest expressions.

Why a payments stock moved like a rocket

StoneCo provides card-payment and financial software to small and mid-sized merchants in Brazil, so its fortunes are tied closely to the local economy, local interest rates and the Brazilian real. When investors suddenly expect a friendlier fiscal path, companies like StoneCo tend to move hardest.

StoneCo trades at about 3.6 times trailing earnings, a figure that drew attention as sentiment toward Brazil shifted. Press coverage cited the view that "voters are upset about high taxes and Lula's stewardship of the economy."

StoneCo had plenty of company. Fellow fintechs Inter & Co (NASDAQ:INTR) and PagSeguro (NYSE:PAGS) surged, XP (NASDAQ:XP) soared, and the big bank ADRs Itaú Unibanco (NYSE:ITUB) and Banco Bradesco (NYSE:BBD) jumped. In São Paulo, the Ibovespa closed at a record 206,911.89, its first close above 200,000, while the real strengthened to about 5.00 per dollar.

Before the open, Quantitas chief economist Ivo Chermont had predicted the mood: "Investors will wake up on Monday to a very powerful rally across asset classes." Pedro Galdi of AGF Investments put the market's wish list bluntly: "The market wants change, it wants reform, it doesn't want a high public deficit."

A record day for the Nasdaq

The wider backdrop helped. The Nasdaq Composite rose 286.45 points to a record close of 27,477.31, while the S&P 500 gained 51.23 points to 7,773.95, just shy of its summer record. The Dow added 90.94 points to 51,267.90.

Friday's weak September jobs report, which showed payrolls rising by only 29,000, cooled bets on another Federal Reserve rate hike in October. Traders now see roughly a one-in-four or smaller chance of an October move. Yet the 10-year Treasury Yield still climbed to its highest level since 2002, and the ISM services survey showed prices paid at their highest since July 2022.

Capital.com's Daniela Hathorn summed up the tension: "growth stocks are rallying because Fed expectations have softened, while the Risk-Free Rate against which those valuations are judged remains exceptionally high."

What to watch

The big date for StoneCo and every Brazil-linked stock is the Oct. 25 runoff between Bolsonaro and Lula. Sabio's Bryan Harris said before the open that "the market will be looking for clear signals from Bolsonaro that he is serious about tackling the country's problems."

In the US, the Federal Reserve releases minutes of its September meeting on Wednesday, Oct. 7, at 2 p.m. ET, and the next policy meeting runs Oct. 27–28. Big Earnings begin with PepsiCo on Thursday and Delta Air Lines on Friday, before the banks kick off on Oct. 13. StoneCo's next Quarterly Report will show how much of Monday's optimism its merchants are actually feeling.