Sure, the Santa Claus rally is a charming tradition. But according to Jay Woods, Chief Market Strategist at Freedom Capital Markets, investors obsessing over whether stocks rise in late December are missing the real plot heading into 2026: What happens when the Supreme Court rules on tariffs?

The Santa Story Everyone Loves

Let's talk about Santa first, because it's December and everyone wants to believe in market magic. The Santa Claus indicator tracks the last five trading days of the year plus the first two trading days of January. If stocks rise during this stretch, conventional wisdom says good times lie ahead.

"It's a fun little indicator," Woods told MarketDash in a recent interview. "It's not as important as people make it sound. It's important because if it happens, we'll probably close at new highs."

The numbers give the indicator some credibility. Since 1950, Santa has shown up about 79% of the time, delivering an average 1.3% return for the S&P 500. Since 1994, the rally period has failed only eight times, and after four of those failures, the market ended the following year lower.

For 2025, the Santa window runs from Wednesday, Dec. 24 through the close on Monday, Jan. 5, according to Woods' weekly newsletter.

Why does this pattern exist? Woods points to year-end bonuses hitting bank accounts, general holiday optimism, and fund managers dressing up their portfolios by buying winning stocks before they have to show clients what they've been up to.

"People who like to use Santa Claus in their metaphors when it comes to the market will already say he's come to town because we've had like a 4% rally in the overall market coming into the Christmas week," Woods said.

The SPDR S&P 500 ETF Trust (SPY), which tracks the S&P 500, recently closed at $684.83. That puts it up 17.1% year-to-date and near its all-time high of $691.20. So yes, it's always nice to end the year with markets at record levels.

What Really Matters in 2026

Here's where things get serious. Woods thinks tariffs will dominate the 2026 narrative, but not in the way they dominated 2025. This time, it's all about the Supreme Court.

"I think we have a lot of bigger issues to look forward to as we start the new year including the Supreme Court decision," Woods said. "The Supreme Court decision is the one thing I'm focused on. I was hoping we would get that out of the way before we started 2026. We didn't."

Tariffs were already a massive story in 2025, driven by President Donald Trump's second term. Trump loves tariffs—it's reportedly one of his favorite words. But the market hates the uncertainty they create, and now that uncertainty is getting amplified by a legal challenge that could reshape everything.

Woods warned that the ruling injects a "new level of uncertainty" into markets, pointing to volatility around "Liberation Day," the "100 deals" pledge, and the "TACO trade."

If the Supreme Court rules against the tariffs, the implications cascade everywhere. How do companies get repaid for tariffs they've already paid? How are consumers impacted? How do foreign countries get compensated? Nobody knows, and markets despise not knowing.

Take Costco Wholesale (COST), which has already filed a lawsuit seeking repayment. Or consider Nike Inc. (NKE), a company Woods says has been "crushed due to tariffs." If the court deems tariffs illegal, does Nike rebound because companies are owed money?

"See if they get a rebound because now the tariffs were deemed illegal and we are owed money," Woods said.

Woods believes the first half of 2026 could represent the market's peak for the year, citing several factors including this tariff uncertainty. And that's a problem because investors want to focus on earnings growth, not legal drama.

"This is not what we will need coming out of the gates when we want to focus on earnings growth," Woods said.

So enjoy the Santa rally if it shows up. Just remember that the real test for 2026 starts when nine justices make a decision that could reshape trade policy, corporate profits, and market direction all at once.