Sometimes the best trade for next year is hiding in this year's trash pile. According to Goldman Sachs, one of Wall Street's most reliable seasonal patterns is setting up again, and it involves buying exactly the stocks everyone spent 2025 avoiding.

The investment bank analyzed 23 years of market data and found something interesting: stocks that lagged the market in one year have a habit of outperforming the S&P 500 during the first quarter of the next year. It's not foolproof, but it's consistent enough that traders watch for it every January.

The Psychology Behind Buying Last Year's Losers

The logic is straightforward. When the calendar flips, investors reassess their portfolios with fresh eyes. Beaten-down names that looked toxic in December suddenly look like mean-reversion candidates in January. Tax-loss harvesting wraps up, new capital gets allocated, and suddenly those stocks everyone dumped start catching bids.

Goldman defines a laggard as any stock landing in the bottom third of S&P 500 performers based on share price return, sector-relative performance, or drawdown from the yearly high. Think of it as the market's clearance bin, priced for pessimism.

The strategy doesn't work every year. In 2024, it flopped hard with only 23% of laggards outperforming. But in 2025, it bounced back with a 53% hit rate. Over the full 23-year period, the pattern showed up in 14 years, delivering a solid edge over the broader index during Q1.

"Prior year's laggards have a tendency to become leaders in Q1 of the following year," said Goldman analyst Deep Metha.

This Year's Laggards Look Especially Weak

Here's where 2025 gets interesting. The underperformers this year aren't just lagging—they're getting demolished. As of early December, the average laggard is down 19% in absolute terms and trailing the S&P 500 by a painful 36%. Those numbers are worse than the long-term averages of negative 17% and negative 28%, respectively.

Translation: There are more deeply discounted names than usual, which could mean more upside if the pattern holds.

Breaking it down by sector, Materials, Consumer Discretionary, and Healthcare laggards have been hit the hardest relative to the market. Energy and Industrials laggards have held up better, though they're still in negative territory.

Goldman's Shopping List for the Laggard Trade

Goldman didn't just identify the pattern—they built a list of specific stocks they think are mispriced and poised to lead a potential first-quarter rally in 2026. Here's what they're watching:

• Fortinet Inc. (FTNT), Pool Corp. (POOL), and Hormel Foods Corp. (HRL): All three carry Buy ratings from Goldman analysts, even though most of Wall Street is sitting on the sidelines with neutral or bearish views.
• Monday.com Ltd. (MNDY), ConocoPhillips (COP), and AECOM (ACM): These names have Goldman earnings estimates for 2026 and 2027 that sit at least 3% above consensus, suggesting the Street might be too pessimistic.
• Pinterest Inc. (PINS), Viper Energy Inc. (VNOM), and Fortune Brands Innovations Inc. (FBIN): All three show expanding free cash flow margins and sport FCF yields above 5%, which tends to attract value-focused buyers.
• Ares Management Corp. (ARES), Workiva Inc. (WK), and e.l.f. Beauty Inc. (ELF): Expected to deliver annual sales growth above 10% through 2027, a solid runway for multiple expansion.
• Adobe Inc. (ADBE), Iron Mountain Inc. (IRM), and Regal Rexnord Corp. (RRX): These stocks show improving return-on-capital trends that historically lead to valuation recoveries once macro headwinds ease.
• Constellation Brands Inc. (STZ), Vertex Inc. (VERX), and Werner Enterprises Inc. (WERN): All are expected to see margin rebounds next year after a rough 2025, setting up for positive earnings surprises.

Does This Actually Work?

The laggard-to-leader trade isn't a sure thing. Some years it delivers, other years it doesn't. But with a 14-out-of-23 track record and this year's laggards looking unusually weak, the setup is worth paying attention to.

If you're a contrarian by nature or just looking for something different from the crowded momentum trade, these beaten-down names might be exactly where the action is come January. At the very least, it's a reminder that in markets, last year's trash sometimes becomes next quarter's treasure.