As the 2025 calendar year draws to a close, the final weeks of December are witnessing a familiar ritual on Wall Street: tax-loss harvesting. Investors are aggressively shedding their biggest losers to offset capital gains, creating a wave of artificial selling pressure that has pushed several high-quality stocks to multi-year lows. However, for contrarian investors, this seasonal exodus represents a prime entry point. According to the latest "Tax Loss Tacticians" screen from Evercore ISI, the stocks currently being discarded for tax reasons are the most likely candidates for a significant "bounce-back" rally as the calendar turns to January 2026.

The immediate implication of this trend is a bifurcated market where the "winners" of 2025 continue to see momentum, while the "losers" face a final, often irrational, leg down. Market analysts, led by Evercore’s Julian Emanuel, suggest that this technical selling creates a "spring-loaded" effect. When the selling pressure vanishes on January 1st, these oversold names often experience a rapid re-rating, outperforming the broader market in what is historically known as the "January Effect."

The Evercore Methodology: Hunting for the "Fresh Start" Bounce

As of December 22, 2025, the market is navigating a landscape defined by high interest rates and shifting consumer sentiment, which has left several former market darlings in the doldrums. Evercore ISI’s methodology for identifying 2026 recovery candidates is not merely about buying what is "cheap." Instead, it employs a rigorous three-pronged quantitative screen. First, the firm identifies stocks in the bottom quintile of performance within the Russell 3000. Historically, this group has outperformed the broader market by an average of 3% in the two months following the peak of tax-loss selling.

The timeline of this year’s sell-off has been particularly acute. While institutional tax-loss selling typically peaks around October 31st—the fiscal year-end for many mutual funds—retail selling has intensified throughout December 2025. This has been exacerbated by a late-year surge in the S&P 500, which has left investors with significant capital gains they are desperate to offset. Key players in this trend include major hedge funds and retail brokerage platforms, where automated tax-harvesting tools have accelerated the liquidation of underperforming positions in companies like Fiserv (NYSE: FI) and The Trade Desk (NASDAQ: TTD).

Candidates for the 2026 Recovery: Winners and Losers of the Screen

The stocks currently hitting the Evercore "Tax Loss" screen are a mix of fintech laggards, retail giants, and healthcare providers. Fiserv (NYSE: FI) stands out as one of the most significant potential winners of a January reversal. Down approximately 70% year-to-date as of late December 2025, the payments giant has been punished by a combination of slowing consumer spending and aggressive competition. However, Evercore’s screen highlights that Fiserv remains a cash-flow-positive entity with a high buyback yield, making it a classic "fresh start" candidate for 2026.

Similarly, the retail sector has provided several candidates. Lululemon Athletica (NASDAQ: LULU) and Deckers Outdoor Corp. (NYSE: DECK) have both seen their valuations contract by more than 50% in 2025. While these companies have struggled with inventory management and shifting fashion trends this year, they maintain "Outperform" ratings from many analysts. Under the Evercore methodology, these "High Quality Laggards" are prime targets for a technical snap-back. Conversely, the "losers" in this scenario are the investors who sold at the bottom of the December trough, potentially missing out on a double-digit recovery in the first quarter of 2026. Other notable names on the bounce-back list include Gartner, Inc. (NYSE: IT) and Molina Healthcare (NYSE: MOH), both of which have been caught in the bottom decile of S&P 500 performance this year.

Broader Significance: The January Effect in a Post-Inflationary Market

The significance of the tax-loss selling bounce-back extends beyond individual tickers; it serves as a barometer for market health and investor psychology. This event fits into a broader industry trend where quantitative and algorithmic trading have magnified seasonal anomalies. In 2025, the ripple effects of this selling have been felt most heavily in the Small-to-Mid-Cap (SMID) space, which Evercore notes is more susceptible to price distortions from institutional outflows.

Historically, the "January Effect" has been a reliable phenomenon, but its success in 2026 will be a critical test of whether the market has truly moved past the inflationary fears that dominated the early 2020s. Regulatory shifts in tax policy or potential changes to capital gains rates in the coming year could also influence how aggressively investors harvest losses in the final days of December. Compared to previous years, such as the tech rout of 2022, the 2025 laggards are often companies with solid balance sheets that have simply fallen out of favor, rather than companies facing existential crises.

What Comes Next: The Road to Q1 2026

Looking ahead to the first quarter of 2026, the short-term outlook for these tax-loss candidates is largely positive, provided that macroeconomic conditions remain stable. Investors should watch for the "turn-of-the-year" effect, where capital is reallocated from the 2025 winners into these oversold laggards. A potential strategic pivot for these companies will involve aggressive share buybacks; as Evercore identifies, companies in the top quintile of buyback activity often lead the recovery.

However, challenges remain. If the Federal Reserve maintains a "higher-for-longer" interest rate stance into 2026, the cost of capital could dampen the recovery for debt-heavy laggards. Scenarios for 2026 include a "V-shaped" recovery for tech-adjacent names like The Trade Desk (NASDAQ: TTD) if advertising spend rebounds, or a more prolonged "U-shaped" recovery for managed care stocks like Centene Corp. (NYSE: CNC), which face ongoing regulatory headwinds.

Final Assessment: Navigating the Year-End Liquidation

The year-end sell-off of 2025 has created a target-rich environment for disciplined investors. The key takeaway from the Evercore ISI methodology is that the current weakness in names like Chipotle Mexican Grill (NYSE: CMG) and CarMax, Inc. (NYSE: KMX) is largely a product of tax-related technicalities rather than a fundamental collapse of their business models. As the market moves into 2026, the removal of this artificial selling pressure should act as a natural catalyst for price appreciation.

Investors should remain vigilant in the coming months, watching for high-volume "up days" in early January as a signal that the bounce-back is underway. While tax-loss selling provides a compelling entry point, the lasting impact will depend on these companies' ability to deliver on earnings expectations in the new year. For now, the "January Snap-Back" remains one of the most anticipated tactical trades for the start of 2026.

This content is intended for informational purposes only and is not financial advice.