As Christmas approaches, investors’ hopes rise for the traditional year-end rally in the stock markets. The so-called Santa Claus Rally is a long-observed phenomenon based on historical data showing that December is often one of the most profitable months of the year. On average, it accounts for nearly a quarter of the stock market’s total annual gains. Whether this trend will hold true this year remains uncertain.
The term Santa Claus Rally was coined in 1972 and originally referred only to the final days between Christmas and New Year’s. Although statistics support its existence, the reasons behind it are debated. Several explanations have been proposed: holiday optimism, lower trading activity, or the “fresh start effect,” when investors and fund managers adjust strategies or allocate new capital. Whatever drives this phenomenon, one principle holds over the long term: investors should stick to their long-term strategy rather than shift their approach because of seasonal trends.
This year, however, markets enter the holiday period with some uncertainty about what lies ahead. On one side, strong corporate results support the belief that the bull market will continue. On the other, nerves are rising over high valuations and the risk of a potential correction. This combination may lead to greater volatility and increase the need for effective risk management.
Still, investors have little to complain about this year. Equity markets in 2025 have once again delivered above-average growth. The S&P 500 has already gained 14%, while the Prague Stock Exchange has surged an impressive 43.5%. Markets are moving full speed ahead, supported by strong corporate earnings and margins. The earnings season has been solid, and forecasts for 2026 expect profit growth of roughly 13% for U.S. companies and around 9% for European firms.
The macroeconomic environment is also favorable. Inflation is nearly subdued, and U.S. trade policy has not yet created meaningful inflationary pressure. This opens the door to additional interest-rate cuts.
Investors must still be mindful of risks. Stocks are trading at premium valuations, leaving little room for error. After recent volatility, markets remain on edge. This does not necessarily signal an impending downturn, but it does increase the market’s sensitivity to bad news.
In the coming year, the focus will need to be on high-quality companies with robust business models. Whether we actually see a Santa Rally this year is not decisive for long-term investors. This period can instead be used to prepare strategies for the year ahead.
This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.
