Luxury stocks look ready for a stronger year after their ‘detox’

Optimism is building that a second-half rally in Europe’s luxury-goods sector can extend into the new year as signs point to better times for the continent’s flagship equity sector. Upbeat third-quarter earnings, a recovering Chinese market and a wave of newly installed creative directors have all spurred confidence that the post-pandemic hangover could soon be over, leading a slew of analysts to turn more positive in recent weeks. “We are entering 2026 hopeful that the worst is over,” said UBS Group analyst Zuzanna Pusz. “Although the recovery is still at an early stage, there are reasons to be more hopeful amid recovering Chinese demand and an increased level of creativity in the industry, which could bring consumers back to stores.” Luxury stocks rally on China market recovery Luxury stocks had a rough ride in the first half of 2025 as concerns over slowing demand in China and U.S. President Donald Trump’s tariffs weighed heavily on sentiment. A Goldman Sachs Group basket of European names fell 9% through the end of June, only to rally 12% since. The question for investors now is whether the rebound has room to run. For UBS’ Pusz and others, the signs favor the bulls. After a year of stagnation for the industry, Pusz projects a return to 5% organic sales growth. That’s in line with other brokers such as JPMorgan Chase & Co.’s Chiara Battistini, who for the first time in two years expects the sector to report increased sales numbers. Oddo BHF strategist Thomas Zlowodzki this week upgraded European consumer goods to neutral from underweight due to his bullishness about the outlook for luxury. “We saw some signs of life in the third quarter,” wrote HSBC Holdings analysts including Erwan Rambourg and Anne-Laure Bismuth. “What we are now anticipating is proper reversion to growth for the industry in 2026.” All global regions are expected to grow in the mid-single digits next year, with a major contribution coming from China. Authorities in Beijing are mulling further stimulus to meet economic growth targets and revive consumer demand. Chinese shoppers account for more than a quarter of annual luxury sales and their purchases are projected to grow by about 6% in 2026, a sharp turnaround from the 5% decline recorded this year, analysis by UBS shows. That improvement will be particularly crucial to brands most exposed to this group of customers, like Moncler and Swatch Group. The end of ‘stupid growth’ Still, the guarded confidence doesn’t mean market participants expect a return to the sector’s golden days. At the beginning of the decade, seemingly insatiable demand from Chinese customers and savings accrued during pandemic lockdowns practically guaranteed double-digit growth rates across brands. “These were years of stupid growth. Some brands overdid it and grew too much, too quickly,” said Flavio Cereda, investment director at GAM UK. “The period we’re coming out now was almost one of detoxification.” Demand from aspirational consumers, in particular, is expected to remain below levels observed during the boom period. This cohort has cut back on discretionary spending in the face of higher inflation, making it harder for affordable luxury firms to make a comeback. Take Danish jewelry maker Pandora: its stock is down 44% this year and has trailed peers. A lot of the good news is also likely priced in and companies will have to deliver on earnings to win over investors. The forward price-to-earnings ratio for the sector is now back near 30, a four-year high. While that’s still below the peak, it’s about double the level of the broader market. “With continued macro uncertainty, muted price/mix contributions and a consumer that is increasingly discerning, we anticipate polarization among brands and categories to remain elevated,” JPMorgan’s Battistini wrote in a note. In terms of those that might deliver, Richemont is an analyst favorite, crowned as top pick at UBS, JPMorgan, HSBC and Deutsche Bank. The Swiss owner of jewelry brands such as Cartier and Van Cleef & Arpels has withstood the downturn better than most peers. It posted double-digit growth in the last quarter and is the continent’s best-performing major luxury stock this year, even outpacing turnaround stories like Kering and Burberry Group. “Anecdotally, when I talk to people who are looking to spend their bonus, it almost costs them the same to buy a piece of jewelry that’s going to last forever than to buy a handbag,” said Morningstar analyst Jelena Sokolova. “The relative value proposition has become much more attractive.” Most of all, optimism surrounding the sector rides on the fortunes of industry bellwether LVMH, whose shares have surged 45% since late June. The Louis Vuitton owner unexpectedly returned to growth in the third quarter, including China, just as it opened a flagship Louis Vuitton store in Shanghai, built in the shape of a vessel. “The stock traded at a multiple this summer so low it implied they wouldn’t come back — I thought that was ridiculous,” said GAM’s Cereda, who doubled the LVMH holding in his portfolio in June. “It’s still not all great at LVMH, but they know what to do and they have the skills to do it.” By Levin Stamm and Michael Msika

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Luxury stocks look ready for a stronger year after their ‘detox’