Luxury tends to bounce when confidence is this low

Owning luxury stocks has become almost a contrarian trade, but signs that consumer confidence and earnings growth are bottoming out hint at some relief for the battered sector. European luxury names trailed the wider market by as much 25% until May, when they stabilized. Still, relief rallies have been brief and the stocks remain laggards. A recovery in sales has been elusive, leaving consumer stocks broadly depressed, along with sentiment among shoppers. Stimulus efforts in China have fallen short of sparking a revival at home or abroad for a sector struggling to shake off the effects of the Iran war. Why low consumer confidence has historically signaled a luxury stock rebound “Interestingly, when consumer confidence is at lows, such as most recently, consumer groups tended to outperform over the next 12 months,” said JPMorgan Chase & Co. strategists led by Mislav Matejka. They flag that luxury tends to be among the sectors faring best in such setups. “Big picture, consumer cyclicals remain in the eye of the storm, with profit warnings and cautious guidance, but they could see better performance ahead.” The European luxury sector has outstripped the broader market by 9% and 12% on average after a trough in the University of Michigan Consumer Sentiment Index, the strategists said. They are overweight the sector on a global basis, a view based on potential wealth effects ahead. They see Korea becoming a growth engine with retail sales so strong that this market now represents larger exposure than the Middle East. Meanwhile, Chinese demand should start improving as the macroeconomic environment settles. Earnings growth has been subdued for about two years, especially when compared to the broader market. Yet, this trend is finally showing signs that the worst is over, and profit estimates now point to a pickup. “If someone doesn’t have any luxury exposure, it can be an idea to start accumulating,” said Christina Carlsten, a senior fund manager at Banque Piguet Galland. “It’s an anti-consensus trade. So it’s for long-term investors and might take some time.” China demand and offshore wealth taxes cloud the luxury recovery That said, any recovery could be fragile. Attention has recently returned to China, after weaker import data and fears of a slowdown in purchasing in July and August given increased taxation of offshore wealth. “The industry data we track shows that on a regional-weighted average basis, global luxury data points to a three percentage point slowdown in the third quarter 2026 to-date versus the second quarter, and this is still not yet including September which carries the toughest comparison,” said Bank of America analysts led by Ashley Wallace. The BofA team added that the slowdown was most evident in the US, Japan, South Korea and Macau, which were the strongest markets in the second quarter, while European Union tourism is holding up better. They have buy ratings on stocks including LVMH, Hermès International and Richemont, adding that the recovery in luxury demand will be progressive, rather than linear. Valuation-wise, the sector is back near its 10-year average, trading at a forward price-to-earnings ratio of about 25. A closer look shows some major divergences. LVMH, for example, now trades at a 25% discount to its peers, the top of a 10-year range, making it among the cheapest stocks in the sector. That warrants a selective approach. Investors have moved on from rewarding diversification and now prefer recovery stories and specific trends. For instance, the widespread pessimism among households is also reflected in how consumers still buying luxury items have shown a preference for watches and necklaces over handbags and clothing. A BofA basket that tracks hard luxury stocks has outperformed its soft-luxury equivalent by more than 40 percentage points since early April, reflecting more robust earnings trends for jewelry names during the war. As a consequence, Pandora and Cartier owner Richemont are among the best luxury performers in 2026, while fashion behemoths LVMH and Hermès have trailed the rest of the industry, down 30% and 27%, respectively. Jewelry “remains one of luxury’s most attractive categories, combining superior growth, lower luxury penetration, greater pricing power and broader price depth than most personal luxury goods categories,” Bernstein analysts Luca Solca and Maria Meita wrote. That supports the case for Richemont, and investors continue to underestimate the extent to which the company is “structurally advantaged relative to the broader luxury sector,” they said. By Michael Msika and Levin Stamm

Luxury tends to bounce when confidence is this low

How Bottega Veneta weaved China’s forever it bag

Upgrade to Pro

Sectors

Insights

Company

Luxury tends to bounce when confidence is this low

How Bottega Veneta weaved China’s forever it bag