Wall Street has been sizzling hot this holiday season, with the three major U.S. bourses extending the seven-week solid momentum. Speculation that the Fed is done with interest rate hikes is the major catalyst. The solid trend is likely to continue, given that the Santa Claus rally is on the way.

Santa Claus rally refers to the increase in stock prices in the final week of the calendar year (i.e., between Christmas and New Year’s Day) that extends into the first two days of the New Year. This looks more real this year, given that the Fed has boosted optimism in the stock market by indicating deeper rate cuts than expected for the next year.

Against such a backdrop, there are some hidden gems, or Secret Santa as we call them, that could surprise investors with big returns this Christmas. We have chosen five stocks that have underperformed this year but have a Zacks Rank #1 (Strong Buy) or 2 (Buy) with a Momentum Score of B or higher. Some of these are Enanta Pharmaceuticals, Inc. ENTA, OneConnect Financial Technology Co. OCFT, KNOT Offshore Partners LP KNOP, Hippo Holdings Inc. HIPO and H World Group Limited HTHT from different segments of the market. You can see the complete list of today’s Zacks #1 Rank stocks here.

Good Tidings Flow

With inflation easing and the economy holding up better, the Fed has shifted to a dovish view. The central bank expects the federal funds rate to fall to a range of 4.4-4.9% in 2024, down from the current 5.25% to 5.50%. Markets have been pricing in a nearly 60% chance that the Fed will begin to cut rates at its March meeting, up from 40% the day prior, per the data from CME Group.

Americans are feeling more confident about the economy than they did over the past few months, heading into Christmas. Consumer sentiment rebounded sharply in early December as worries about inflation receded. Retail sales also posted surprise growth in November after declining in the prior month. The data points to resilient consumers and a strong start to the holiday season, indicating that Santa is on the way.

Though good tidings have already started flowing in, thanks to the Fed, year-end seasonal factors such as holiday optimism, tax-related affairs, investment of Christmas bonuses, mutual fund manager window dressing, and the “January effect” will continue to push stocks higher.

Since 1950, the S&P 500 has risen 1.3% on average over the final five trading days of December and the first two days of January, according to the Stock Trader’s Almanac. The Santa Claus rally has occurred in 59 years since 1950, including 2022-23, when the S&P 500 rose 0.8% over the seven trading days.