Leading luxury goods companies may see a lackluster year-end performance with no major rally, and investors will likely have to wait until 2027 before a sector recovery becomes visible.
The MSCI Europe Textiles, Apparel and Luxury Goods Index has fallen 25% this year, with technical rebounds in recent months proving unsustainable. The decline exceeds that of the auto sector, the worst-performing segment of the Stoxx 600, which dropped 21%. Luxury sector share prices are down nearly 40% from historic highs, and bullish investors are pinning hopes on the upcoming earnings season, hoping positive news will at least halt the slide.
Analysts led by Zuzana Pusz of UBS Group said: "The Iran conflict, a slowdown in industry self-help measures, and weakening summer consumption have further delayed the recovery process." The team had predicted earnings stabilization earlier this year, but now considers that judgment premature. "We still believe this downturn is a cyclical adjustment rather than a structural recession," the analysts said. They noted that the market has lowered earnings expectations for 2027, with attention increasingly shifting toward weaker consumption trends. The team is most optimistic about hard luxury and recommends overweighting Richemont and the Swatch Group. They recently downgraded Hermes to a sell rating due to its earnings becoming increasingly correlated with the economic cycle.
Two former market darlings of the sector have seen sharp share price declines, confirming the current market environment. LVMH and Hermes have both fallen 40% this year, with valuations dropping to 12-year lows. LVMH's fall from grace is particularly striking: its current valuation carries a 30% discount to the broader luxury sector, a record, with its forward price-to-earnings ratio falling below 16 times. Meanwhile, Hermes' valuation premium relative to the sector has shrunk rapidly, dropping from 100% to 22% in just 18 months.
Analysts led by Natasha Bonnet of Morgan Stanley said: "The weakening macro environment, combined with clear structural headwinds facing the industry, has lengthened the luxury destocking cycle, leaving limited room for valuation expansion over the next 12 months. We continue to favor K-shaped divergence beneficiaries of AI-driven wealth effects." Based on this assessment, the team maintains overweight ratings on Ferrari, Richemont, and Brunello Cucinelli.
The Bonnet team believes that the proliferation of second-hand luxury goods, shrinking room for brand price increases, and so-called "luxury fatigue" constitute additional pressures. They also mentioned that consumption is flowing toward health, wellness, and longevity-related categories, diverting discretionary spending.
It is becoming increasingly difficult for bulls to maintain an optimistic outlook. Oil prices are driving up inflation, interest rates are rising, and middle-class consumption spending and consumer confidence are being hit. After several consecutive quarters of weakness, luxury demand has only seen a mild recovery this year. Brands like LVMH and Hermes are unlikely to replicate their previous strong pricing power, with this year's price increases expected to be the smallest since 2019.
The third-quarter earnings season will kick off with LVMH, which is scheduled to report after market close on Monday. The market widely expects slowing organic growth across the industry, with hard luxury and high-end brands expected to continue outperforming soft luxury. Kering recently struck a cautious tone on its pre-market conference call, citing a deteriorating external environment and continued weakness in the Chinese market.
Nevertheless, there are still some positive signals in the sector. For example, privately held Chanel saw first-half sales surge 16%, in sharp contrast to soft luxury companies like LVMH, with its performance trajectory closer to the hard luxury recovery demonstrated by Richemont, which owns Cartier.
A full industry recovery requires macroeconomic stabilization as well as companies resolving their own specific issues. Goldman Sachs analysts are optimistic about a turning point for the sector. The team led by Erwan Rambourg said: "Aggressive price increases, strategic stagnation, insufficient product innovation, combined with macro headwinds, have dragged down luxury industry sales growth. Can the industry return to steady growth? We believe it can. After three years of post-pandemic normalization adjustments, 2027 will mark an inflection point, with organic sales growth returning to mid-single digits. The core reason is that the industry is gradually resolving the company-specific issues that previously suppressed growth."