I'm Watching the Santa Claus Rally Closely -- Here's What It Could Mean for Your Returns in 2026

Christmas may have come early for investors!

As of market close on Dec. 24, the markets had notched a straight week of gains. Headlines were hyping a "Santa Claus rally," and analysts were getting ready to bust out the milk and cookies early.

But the year's not over yet, and your investments don't disappear on New Year's Eve. Here's what this Santa Claus rally could really mean for your portfolio ... this December and in 2026!

Image source: Getty Images.

Santa's still making his list

Investors are sure saying "ho ho ho," as all the major U.S. stock market indices are up over the past week. The S&P 500 (SNPINDEX: ^GSPC) has gained 3.3% since Dec. 17, the Nasdaq Composite (NASDAQINDEX: ^IXIC) has risen 4.1%, and even the Dow Jones Industrial Average (DJINDICES: ^DJI) is up 1.8%.

But none of this counts as a Santa Claus rally ... at least, not yet.

Technically, the Santa Claus rally period occurs over the last five trading days of December and the first two of January. This year, that's Dec. 24 through Jan. 5 (because the markets are closed on Christmas Day and New Year's Day, as well as weekends). So any potential "Santa Claus rally" gains will come on top of those we've already seen.

How likely is Santa to show up this year?

Over the last 50 years, a Santa Claus rally -- an overall market gain during the rally period -- has happened about 80% of the time. On average, the S&P 500 gains 1.3% during the Santa Claus rally period, compared to an average seven-day market return of 0.2%.

But over the last few years, Santa has shown up far less frequently.

In 2022, 2023, and 2024, the market made big gains in November, which all preceded December pullbacks, including during the Santa Claus rally period. In fact, the last time we had a true Santa Claus rally -- in which the S&P 500 gained more than 1% -- was 2018, when it rose 4.1% (and that was after a 14.2% market drop between Thanksgiving and Christmas).

However, conditions look pretty favorable this year. The S&P failed to set a new record high in November and is coming off of a small 2.6% dip. Market sentiment seems buoyed by the prospect of further Federal Reserve rate cuts in 2026. So, yes, Virginia, the strong rally over the past week seems likely to continue into the Santa Claus rally period.

What does it mean for 2026?

Historically speaking, a successful Santa Claus rally has tended to precede three months of market outperformance, while a negative rally period has prompted three months of underperformance.

That was true this past year: the S&P 500 fell 4.6% in Q1 after a missed rally. It was also true in 2019, when the market surged 13.1% following the last successful Santa Claus rally. But it's not always true: in 2023 and 2024, the market notched solid gains in its first three months following missed rallies.

Despite a missed Santa Claus rally getting 2025 off to a rocky start, it's still been a fantastic year for the markets overall, with the S&P 500 up 17.9% for the year. A successful rally should get 2026 off to a rousing start, but even a missed one shouldn't be any cause to panic.

John Bromels has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.