As investors scramble to harvest tax losses before the December 31 deadline, some of 2025's biggest losers are getting pushed to even more extreme valuations. That creates an opportunity for contrarian investors willing to bet on an old Wall Street pattern: the January Effect.

The phenomenon is straightforward. Stocks that are heavily sold in December for tax reasons often rebound in early January as selling pressure evaporates and bargain hunters move in. While the effect has diminished somewhat since its heyday in the 1980s and 1990s, it remains particularly pronounced for smaller and mid-cap stocks that institutional investors overlook.

The Setup for 2026

This year's tax-loss selling season has created unusually fertile ground for January rebounds. According to Morningstar data, roughly 40% of the 1,000 largest U.S.-traded stocks have declined over the trailing 12-month period—a surprisingly high percentage given the S&P 500's strong year.

The disconnect reflects a bifurcated market where AI-related megacaps soared while many traditional companies struggled. That creates exactly the conditions where the January Effect tends to be most powerful: widespread selling of fundamentally sound companies for purely tax-related reasons.

Four Stocks to Watch

Analysts at Nasdaq have identified four beaten-down stocks with solid fundamentals that appear poised for January rebounds:

1. nCino (NCNO)

The cloud banking software provider has fallen roughly 35% from its 2025 highs despite reporting consistent revenue growth. The selloff appears driven more by the broader software sector rotation than company-specific problems. With banks increasingly digitizing their operations, nCino's addressable market continues to expand.

2. Global-e Online (GLBE)

This cross-border e-commerce platform enables retailers to sell internationally without the logistical headaches. After a punishing 2025, the stock trades at a significant discount to its historical valuation despite the company's continued market share gains. With global e-commerce projected to grow 10% annually through 2030, Global-e is positioned at the intersection of multiple tailwinds.

3. GitLab (GTLB)

The DevOps platform has been caught in the crossfire of software sector selling, with shares down substantially from their 2024 peaks. But GitLab's subscription revenue continues to grow at 30%+ annually, and the shift toward AI-assisted software development could accelerate adoption of its integrated platform.

4. Samsara (IOT)

Samsara's fleet management and industrial IoT solutions have strong retention metrics and expanding use cases. The stock's decline appears disconnected from the company's execution, which has included multiple quarters of better-than-expected results.

How to Play the January Effect

Timing matters when betting on seasonal patterns. Research suggests that much of the January Effect actually begins in mid-December as sophisticated investors anticipate the pattern. By New Year's Day, some of the move may already be priced in.

Key considerations:

  • Watch the wash-sale rule: If you're buying a stock you sold within 30 days for a tax loss, you lose the tax benefit. The IRS is strict about this.
  • Look for fundamental support: Not every beaten-down stock deserves to rebound. Focus on companies where the selling appears tax-driven rather than fundamentals-driven.
  • Set realistic expectations: Historical data shows the January Effect is real but not guaranteed. Treat it as one factor among many, not a sure thing.
  • Consider holding periods: The biggest rebounds often occur in the first few trading days of January. Late buyers may miss the move.

The Risks

Before betting on beaten-down stocks, investors should understand why the January Effect has weakened over time:

  • Market efficiency: As the pattern became well-known, more traders began anticipating it, reducing its magnitude
  • Institutional participation: Hedge funds and other sophisticated investors now exploit the pattern, leaving less alpha for retail traders
  • Macro uncertainty: If investors expect a bear market in 2026, they may continue selling rather than buying in January

IDC expects AI investment momentum to continue in 2026, which could benefit tech-adjacent stocks like GitLab and Samsara. But geopolitical risks and uncertainty about Federal Reserve policy add wildcards that could overwhelm seasonal patterns.

The Bottom Line

The January Effect isn't a get-rich-quick scheme, but it does represent a real market phenomenon backed by decades of data. For investors with a tolerance for volatility and a willingness to buy when others are selling, beaten-down stocks heading into 2026 may offer asymmetric upside.

The key is selectivity. Focus on companies where the decline appears driven by technical factors rather than fundamental deterioration, and you may catch a tailwind that helps your portfolio start the new year strong.