Navigating the 2023 Santa Claus Rally: 3 Top Stock Picks for Year-End Gains

Understanding the Santa Claus Rally

The Santa Claus rally refers to the sustained increase in the stock market indices that occurs during the last trading week of December and the first two trading days of the new year. It was first defined in The 1971 Stock Trader’s Almanac by Yale Hirsch.

Historically, major market indices, including the S&P 500, the Dow Jones, and the Nasdaq Composite, witnessed higher gains during these seven days compared to any other seven trading days of the year. Going back to 1950, the S&P 500 has gained nearly 80% times during this period.

In addition to marking a solid trading period, the Santa Claus rally is used as an early indicator by traders for what may happen in the new year. One of Yale Hirsch’s famous lines states: “If Santa Claus should fail to call, bears may come to Broad and Wall.”

Wall Street Awaits Santa Claus Rally This Year with Stocks Nearing Records

As we head into the last few days of 2023, Wall Street investors are counting on the Santa Claus rally to generate solid returns.

The S&P 500 climbed more than 4% in December alone and is up nearly 24% this year, bringing the index within 1% of a new all-time high. Also, the benchmark index is on track for its eighth consecutive positive week. The high optimism in the stock market is buoyed by solid earnings reports, several signs of strength in the economy, and a growing probability that interest rates will come down soon.

Earlier this month, the Federal Reserve left interest rates unchanged, and the central bank chief Jerome Powell said the historic monetary policy tightening is likely over as inflation falls faster than expected and signaled interest rate cuts into 2024.

Data released last Friday supported the trend of easing inflation, showing annual U.S. inflation, measured by the Personal Consumption Expenditures (PCE) price index, further dropped below 3% in November. The PCE index fell by 0.1% between October and November, the first monthly decline in over three and a half years.

Combined with other latest data indicating disposable personal income and consumer sentiment rising, the U.S. economy seems to be heading into the new year on a solid footing.

“The narrative will continue to be about the Fed making a dovish pivot,” stated Angelo Kourkafas, senior investment strategist at Edward Jones. “That provides support on markets and sentiment and that is unlikely to change next week,”

Investors have demonstrated a substantial appetite for stocks lately. BofA clients bought about $6.4 billion of U.S. equities on a net basis in the last week, the largest weekly net inflow since October last year, BofA Global Research said in a December 19 report.

At the same time, there has been a “sharp increase” in buying among retail investors over the past four to six weeks, Vanda Research said in a note last Wednesday.

“After having chased higher yields aggressively in the past months, the FOMC pivot and strengthening soft-landing narrative have had individuals redirecting their purchases toward riskier securities,” Vanda said in a note. “We expect this trend to continue into the new year as yields remain under pressure.”

3 Stocks to Bet on for Year-End Gains

With a market cap of $1.58 trillion,, Inc. (AMZN) is an e-commerce giant that has a history of performing well during the holiday season. It engages in the retail sale of consumer products and subscriptions through online and physical stores in North America and internationally. The company operates in North America; International; and Amazon Web Services (AWS) segments.

According to the National Retail Federal (NRF), the holiday spending during November and December is expected to rise to “record levels” of between 3% and 4% year-over-year to between $957.30 billion and $966.60 billion, respectively. The NRF projects that online and non-stores sales will grow between 7% and 9% to between $273.70 billion and $278.80 billion.

With NRF projected holiday spending to surge to record levels, Amazon is anticipated to witness significant growth in its total sales volume and profit levels. The e-commerce giant held its latest Prime Day sales event on October 10 and 11, featuring two days of epic deals ahead of the holiday season. Also, AMZN announced plans to hire about 250,000 additional workers across its operations globally for the busy year-end sales period.

The company’s biannual Prime Day events help to drive its revenue. Despite persistent inflation rate, Amazon boasted the biggest-ever Prime Day sale in July this year. U.S. online sales during Amazon’s Prime Day event grew 6.1% year-over-year to $12.70 billion, according to data by Adobe Analytics. The first 24 hours of the shopping event were touted as the “single-largest sales day in company history.”

In addition, AMZN gets a considerable lift from the Black Friday and Cyber Monday sales events held at the end of November and tied to Thanksgiving and Christmas.

After all, AMZN’s trailing-12-month gross profit margin of 46.24% is 30.4% higher than the 35.47% industry average. Its trailing-12-month EBITDA margin of 13.35% is 22.4% higher than the 10.91% industry average. Moreover, the stock’s trailing-12-month levered FCF margin of 5.57% is 25.9% higher than the 5.22% industry average.

For the third quarter that ended September 30, 2023, AMZN’s net sales increased 12.6% year-over-year to $143.08 billion. Its operating income rose 348% year-over-year to $11.19 billion. In addition, the company’s net income and EPS came in at $9.88 billion and $0.94, compared to $2.90 billion and $0.28 in the same quarter of 2022, respectively.

Analysts expect Amazon’s revenue and EPS for the fourth quarter (ending December 2023) to increase 11.2% and 2,510% year-over-year to $165.93 billion and $0.78, respectively. Moreover, the company topped the consensus revenue estimates in each of the trailing four quarters, which is impressive.

AMZN’s stock is already up nearly 78% year-to-date. Further gains could come with a Santa Claus rally.

Another stock that is primed for a holiday season rally is American Eagle Outfitters, Inc. (AEO). It operates as a specialty retailer that offers clothing, accessories, and personal care products under the American Eagle and Aerie brands worldwide. AEO sells its products through retail stores; digital channels, like,, and; and applications.

The solid performance of its key brands, such as American Eagle and Aerie, combined with strategic expansions into premium and activewear segments, indicates considerable potential for AEO’s growth. The company’s store designs, and online enhancements demonstrate its commitment to improving the customer experience.

During the third quarter that ended October 28, 2023, AEO’s net sales increased 4.9% year-over-year to $1.30 billion. Its gross profit was $543.80 million, up 13.3% from the prior year’s quarter. The company’s net income came in at $96.70 million, or $0.49 per share, compared to $81.27 million, or $0.42 per share, in the prior year’s period, respectively.

“I am pleased with our third quarter results which demonstrated the strength of our brands and reflected continued progress on our growth and profit improvement initiatives. Our strategic priorities, underpinned by our customer-first focus and commitment to operational excellence, are propelling us forward,” said Jay Schottenstein, AEO’s Executive Chairman of the Board of Directors and CEO.

“Momentum has continued across the business into the fourth quarter, driven by strong holiday assortments, engaging marketing campaigns and solid execution, supporting our improved outlook for the rest of the year,” Schottenstein added. “Looking ahead, we remain focused on advancing our long-term strategic priorities, as we seek to create consistent growth across our portfolio of brands and generate efficiencies for improved profit flow-through.”

For the full year, AEO’s management forecasts revenue to be up mid-single digits to last year, compared to the previous guidance for revenue up low single digits. Operating income is projected to be in the range of $340 to $350 million, at the high end of prior guidance of $325 to $350 million. This reflects strengthened demand and continued profit improvement. 

For the fourth quarter, the company’s outlook reflects revenue up high-single digits and operating income in the range of $105 to $115 million. The revenue outlook includes a four-point positive contribution from the 53rd week. 

Street expects AEO’s revenue and EPS for the fourth quarter (ending January 2024) to increase 8.5% and 17.8% year-over-year to $1.62 billion and $0.44, respectively. Also, the company has surpassed the consensus revenue and EPS estimates in all four trailing quarters.

Shares of AEO have surged more than 25% over the past month and approximately 45% over the past year.

The third stock, JAKKS Pacific, Inc. (JAKK), also tends to shine during the holiday season. With a market cap of $347.33 million, JAKK produces, markets, sells, and distributes toys and related products worldwide. The company operates through the Toys/Consumer Products and Costumes segments.

The company is primarily benefiting from the expansion of product offerings by strategizing business operations, coupled with the growing focus on partnerships. On November 1, JAKK announced entering a long-term agreement with Authentic Brands Group to design and distribute products inspired by iconic brands like Forever 21 and Sports Illustrated, aiming for a global retail debut in 2024.

The partnership aligns with JAKK’s strategy to expand into new product categories, targeting Millennials and Gen Z while leveraging Authentic’s platform to diversify its seasonal offerings and explore additional collaborations.

JAKK’s trailing-12-month net income margin of 12.18% is 169.5% higher than the 4.52% industry average. Likewise, the stock’s trailing-12-month ROCE, ROTC, and ROTA of 56.52%, 17.03%, and 16.96% are significantly higher than the industry averages of 11.40%, 6.01%, and 3.99%, respectively.

For the third quarter that ended September 30, 2023, JAKK’s reported net sales from the Costumes segment increased 19% year-over-year to $63.70 million. Its gross profit grew 16.4% year-over-year to $106.99 million. The company’s income from operations rose 16.1% from the year-ago value to $62.40 million. Its adjusted EBITDA grew 12.9% year-over-year to $67.07 million.

In addition, the company’s adjusted net income attributable to common stockholders increased 28.4% year-over-year to $50.09 million, and its EPS came in at $4.75, up 25% year-over-year. 

After reporting outstanding fiscal 2023 third-quarter results, Stephen Berman, CEO of JAKKS Pacific, said, “We are looking forward to the holiday season and have recently finished great customer meetings previewing our Fall 2024 product line. We are exceeding our own internal expectations for the full-year and are carefully navigating towards the end of the year given the persistent uncertainty about consumer behavior.”

JAKK’s stock has climbed more than 14% over the past month and is up nearly 100% year-to-date.

Bottom Line

We are heading into the last few days of the year, which typically represents a favorable time for the stock market and investors. Known as the Santa Claus rally, the stock market tends to rise substantially in the last trading week of December and the first two trading days of the new year.

This year, the optimism is high, with the Federal Reserve surprising investors earlier this month by signaling that its historic monetary policy tightening is likely over and projecting interest rate cuts in 2024. Moreover, the latest robust data indicates strength in the U.S. economy.

Of course, year-end holiday shopping offers a considerable sales boost to retailers and other companies, which can help lift stock prices. AMZN, AEO, and JAKK are set to shine in the year-end Santa Claus rally.

While the Santa Claus Rally offers profitable investment opportunities, day traders should approach it with immense caution and implement an effective risk management strategy. Pre-setting position sizes, setting stop-loss orders, diversifying portfolios, and adhering to a well-defined trading plan are essential steps for managing risk during the rally.

What's in Store for Retail Stocks This Earnings Season?

Amid soaring inflation that continues to burden consumer budgets, there appears to be a prevailing sense of optimism. Early Black Friday discounts in October were notably higher than in past years, indicating retailers’ concerns about potential subdued demand during the pivotal holiday shopping period.

Several of America's largest retailers have begun rolling out Black Friday sales events this week. According to studies, consumers are expected to spend an average of $567 during Black Friday and Cyber Monday sales, a 13% increase year-over-year. This trend is driven by shoppers pursuing the best deals amid the economic strains of high prices and interest rates.

The expected average spending sets a record for Deloitte’s annual Black Friday-Cyber Monday survey, with about 84% of shoppers expressing confidence in adhering to the budgets they established in September.

Despite ongoing increases in living costs impacting household budgets, around 74% of consumers plan on taking advantage of the November sales this year. According to the National Retail Federation, holiday spending is predicted to grow between 3% and 4% annually. This year’s estimated holiday spending falls between $957.3 billion and $966.6 billion.

Shopping trends are shifting from physical stores to digital dominance. Data from Adobe Analytics reveals that in 2022, approximately 69% of Black Friday shopping was conducted online, leading to record-breaking sales worth $9.2 billion.

U.S. e-commerce sales comprised 21.4% of total retail sales in 2023's third quarter, reaching $271.7 billion, a 7.8% year-on-year growth, according to Digital Commerce 360's analysis of U.S. Department of Commerce data. Concurrently, total retail sales for the quarter rose by 3.2% to reach $1.267 trillion.

Online shopping, which gained substantial popularity during the COVID-19 pandemic and continues to maintain this momentum, is anticipated to grow between 7% and 9% this holiday season, contributing significantly to overall spending.

However, McKinsey’s study found that U.S. consumers are less likely to overspend this holiday season than last year, potentially due to high inflation and escalating interest rates that have driven credit card annual percentage rates (APRs) to new peaks.

With retailers American Eagle Outfitters, Inc. (AEO), Abercrombie & Fitch Co. (ANF), Urban Outfitters, Inc. (URBN), and Kohl's Corporation (KSS) set to unveil their earnings reports on November 21, let’s see what’s in store for these retail stocks.

American Eagle Outfitters, Inc. (AEO)

Young adult apparel retailer AEO appears well-positioned to capitalize on its robust brand appeal and steady demand propelled by its engaging product range and innovative marketing endeavors. The corporation's impressive growth can be ascribed to favorable demand for its flagship brands and strong efforts in branching into new markets.

In the previous quarter, AEO reported revenue of $1.20 billion, a 0.2% year-on-year increase, on par with the industry analyst estimates. The last reported quarter proved exceptionally productive for the retailer, with EPS surpassing projections, primarily due to robust growth in the Aerie segment. This brand continues demonstrating a stunning growth trajectory, as illustrated by its stellar performance in the first quarter of fiscal 2023.

Additionally, AEO's heightened revenue forecasts and operational income guidance for the fiscal year 2023 (operating income is expected to be in the range of $325 to $350 million, up from prior guidance of $250 to $270 million) – are strikingly optimistic.

The company's progressive strategies, robust omnichannel capabilities, and focus on efficient stock management likely contributed to an elevated top and bottom line for the forthcoming quarter's performance. A strong digital presence is projected to further bolster the fiscal third quarter performance.

As 2023's second half unfolds, AEO expects a positive reception for its early autumn merchandise, a development expected to amplify fiscal third-quarter sales, especially for the Aerie brand. AEO also predicts greater gross margins, fueled by reduced freight, product costs, and markdowns.

However, AEO has been contending with an upswing in corporate compensation, incentives, and other corporate expenses, only partially mitigated by cost efficiencies. A surge in selling, general and administrative (SG&A) expenses has also been observed. An uncontrolled increase in costs and expenses could affect the company's margins and profitability in the quarter awaiting results.

AEO is expected to surpass top and bottom-line growth when it reports third-quarter fiscal 2023 results. Analysts expect its revenue and EPS for the fiscal third quarter ending October 2023 to increase 3.3% and 15.3% year-over-year to $1.28 billion and $0.48, respectively.

AEO’s shares have gained around 40% year-to-date. Wall Street analysts expect a price target of $19.25 in the next 12 months, indicating a potential downside of 1.8%.

Abercrombie & Fitch Co. (ANF)

With a market cap of over $3.7 billion, young adult apparel retailer ANF has been gaining from consistent growth momentum in its Abercrombie brand and a systematic improvement in its Hollister brand. Strategic store optimization initiatives and reduced freight expenses are aiding the company's thriving bottom line.

ANF has emphasized that efforts to enhance the brand image of Hollister have begun yielding positive results. The company’s Always Forward Plan, which encompasses strategic investments in stores, digital platforms, and technology, promises to bolster its positive trajectory.

It has been experiencing demand upsurge attributable to successful rebranding initiatives that align with prevailing fashion trends. Additionally, ANF's persistent endeavors to diversify its inventory across all brands have enticed customers to explore a wider product range, potentially promoting top-line growth in the soon-to-be-reported quarter.

For the fiscal third quarter, decreased freight expenses and substantial growth in average unit retail (AUR) is projected to facilitate margin expansion. Management forecasts an 8% to 10% operating margin in the third quarter, a significant increase from 2.4% in the year-ago quarter. This expansion is driven by a rise in gross profit rate spurred by lower freight costs, higher AURs, and moderate operating expense leverage on increased sales.

Analysts expect its revenue for the fiscal third quarter ending October 2023 to increase 11.6% year-over-year to $982.40 million, while its EPS for the quarter is expected to increase significantly year-over-year to $1.07.

ANF is venturing into the earnings season, with Wall Street analysts anticipating a price target of $66.50 in the next 12 months, indicating a potential downside of 9.2%.

Urban Outfitters, Inc. (URBN)

URBN, a retail and wholesale consumer goods company, has reaped significant advantages from its strategic initiatives. The technological advancements, rationalization of store count, and focused merchandising tactics have all played pivotal roles in reinforcing their prosperity.

The robust reinforcement of its direct-to-consumer operations, the enhanced productivity across existing channels, the expansive offering of products, and the optimized inventory management significantly strengthened the company's positioning.

URBN’s exponential acceleration of digital activities has further solidified its market presence. A key contributor is URBN's Nuuly, a subscription-based rental service that amplifies the company's premier brands among its customer base instead of eroding wholesale profitability.

Nuuly is projected to attain profitability by the third or fourth fiscal quarter of 2023. Although relatively new, the subscription service has thrived, with revenues nearly doubling year-on-year in URBN's second quarter due to an impressive 85% surge in active subscribers.

An uptick in consumer demand at the beginning of the fiscal third quarter is poised to drive total company sales into high single-digit growth. This progress, backed by a mid-single-digit increase in the Retail segment's comparable sales and a substantial double-digit spike in Nuuly's segment sales, places URBN in a favorable position.

The financial prognoses indicate a gross margin improvement of over 400 basis points year-over-year, driven by an increase in initial product margins due to decreased inbound freight costs and merchandise markdowns.

However, challenges presented by a rigorous operational environment, inflationary pressures, and currency volatility may have posed barriers for the company. Persistent struggles with higher SG&A expenses and subdued wholesale division sales have been troublesome for the retailer. Consequently, deteriorated wholesale unit sales could partially counter the fiscal third quarter's overall sales.

For the fiscal third quarter ending October 2023, URBN is likely to surpass top and bottom-line figures when it releases third-quarter fiscal 2024 results on November 21, after market close. Analysts expect its revenue and EPS for the quarter to increase 7.4% and 106.5% year-over-year to $1.26 billion and $0.83, respectively.

Wall Street analysts expect a price target of $37.92 in the next 12 months, indicating a potential upside of 3.2%.

Kohl's Corporation (KSS)

Leading omnichannel retailer KSS, boasting a market cap exceeding $2.83 billion, continues to prosper from its core initiatives like refining the customer experience, streamlining value strategies, orderly inventory and expense management, and solidifying its financial structure.

To augment customer experience, the retail giant persistently works toward evolving sectors like gift services, Sephora collaboration, home decor, and longer-term new stores. KSS's tactical alliances, notably with Amazon, along with the consistent implementation of omnichannel approaches, have proven fruitful.

Adding to its recent successful ventures, the early savings holiday event "Deal Dash," held from October 9 across over 1,100 KSS outlets and online at, is expected to impact its third-quarter outcomes positively.

KSS rolled out an innovative strategy for attracting potential customers by adding "+ Sephora" to its store signs, a testament to its significant partnership with the beauty retail giant established in 2020.

However, KSS currently contends with issues of rising product costs, which are impacting its profit margins. In the fiscal second quarter of 2023, its gross margin declined to 39%, while SG&A expenses increased 1.6% year-over-year to $1.30 billion.

The surge in SG&A costs could potentially hinder performance results in the forthcoming quarter, with management anticipating nearly a 3% increase due to supplementary store-related investments and the inauguration of 45 small Sephora outlets.

KSS’ digital sales declined 17% year-over-year in the second quarter of 2023 and 18% year-to-date, with clientele reversion to physical stores identified as one of the causes. Alongside this, the elimination of online-only promotions was seen to affect sales. For fiscal 2023, the company projects net sales to decline between 2% and 4%, triggering concerns for future quarters.

KSS could register top-and-bottom-line declines for the fiscal third quarter of 2023. Analysts expect its revenue and EPS for the quarter to decline 2.6% and 54.9% year-over-year to $3.95 billion and $0.37, respectively.

Notably, upcoming earnings may be affected by backlash from a "woke" dispute beginning in May over Pride-themed merchandise sold by KSS. Although this controversy only accounted for two months of the second quarter, it is still unknown if the backlash from conservative consumers further intensified and potentially harmed the company’s performance. Regardless, this issue should not be overlooked, particularly considering KSS' demographic of clientele.

Even though shares of KSS declined about 17% over the past year, it gained over 22% over the past five days. Wall Street analysts expect a price target of $24.90 in the next 12 months, indicating a potential downside of 1.5%.