As the holiday season wraps up, many Americans are preparing to pack away their Christmas decorations. Yet, amid the post-Christmas calm, a familiar phenomenon might be gaining momentum in the stock market—the Santa Claus rally. This term refers to the tendency for stock prices to rise during the final trading days of December and the first couple of days in January. Notably, the S&P 500 saw an uptick on Christmas Eve, suggesting we may be entering this favorable period for investors.
Historically, Santa Claus rallies have occurred in nearly 80% of the past five decades, indicating a strong likelihood that one may unfold this year. The most recent instance was observed between December 24, 2021, and January 4, 2022, during which the S&P 500 surged by 5%. The most significant rally of the 21st century occurred from late 2008 to early 2009, when the S&P 500 rebounded by 7.4% after a sharp decline in October 2008.
Various theories explain the occurrence of these rallies. One prominent hypothesis suggests that many institutional investors take leave during the holiday season, allowing retail investors to exert greater influence over market movements. Additionally, the distribution of Christmas bonuses might contribute to increased activity in the stock market, as consumers invest their extra cash, further boosting prices.
The implications of a Santa Claus rally extend beyond immediate gains; they can also set the tone for performance in the following year. Historically, following late-December rallies, the S&P 500 has registered increases in 12 out of 17 instances. Notably, in most of these cases, the gains have been substantial, often exceeding 20% in a calendar year. However, investors have occasionally faced downturns; a recent example being in 2022, after the S&P 500’s 5% rally at the end of 2021, which ultimately led to a decline of 19.4%.
Looking ahead, it’s challenging to predict definitively whether the S&P 500 will experience a rally this season. The surprisingly strong GDP growth reported for the third quarter of 2025 may temper investor enthusiasm, as some fear it could deter the Federal Reserve from implementing further rate cuts—a move many are hoping for.
Should a Santa Claus rally indeed manifest, the prevailing sentiment is optimistic. Based on historical trends, a rise for the S&P 500 in 2026 seems likely. However, expectations for the extent of these gains should be moderated; a fourth consecutive year of double-digit increases appears improbable. Investors may need to adjust their hopes, as the holiday generosity of the market could be on a tighter budget this time around.
