Is Now the Right Time to Reinvest in Luxury Stocks?
Sentiment is bleak, but that is often when opportunity knocks
After years of post-pandemic exuberance, the luxury sector is facing a harsh reality check. From high-end fashion houses to premium watchmakers, valuations have compressed, investor interest has cooled, and the narrative has shifted sharply from growth to uncertainty. Concerns over slowing Chinese demand, persistent inflation, and shifting consumer preferences have dampened enthusiasm across the board.
Yet history suggests that moments of deep pessimism often precede periods of strong returns. Luxury stocks, known for their pricing power and brand resilience, tend to outperform once sentiment begins to turn. The current environment (marked by widespread skepticism) might just be the setup long-term investors wait for. This reflects the principles I outlined in my article on contrarian investing.
In this article, we examine the key drivers behind the recent downturn, assess whether fundamentals still support a bullish long-term view, and explore whether now could be a timely re-entry point into the luxury space.
The reasons of the fall
Luxury stocks have come under significant pressure over the past year, driven by a combination of macroeconomic headwinds and shifting consumer behavior. One of the primary culprits is the slowdown in China, the previous main growth driver of the sector. As the Chinese economy grapples with a property crisis, weak consumer confidence and slowing growth, spending on discretionary items like luxury goods has taken a hit. Compounding this is the broader global backdrop: persistently high interest rates in Western economies have curbed high-end consumption, and inflation has prompted even affluent consumers to become more selective with their purchases.
On the investor side, the sector’s lofty valuations, built on years of consistent outperformance and premium brand narratives, are being reevaluated. It is a reminder that buying cyclical stocks at the peak of the cycle rarely ends well.
Once perceived as defensive due to their pricing power and loyal customer bases, luxury companies are now being recast as cyclical, especially in a world where economic visibility is low and geopolitical risks are rising. Earnings revisions and cautious guidance from major players like LVMH, Richemont, and Kering have further shaken market confidence.
Winners and losers in a fragmanted market
The recent drawdown in luxury stocks has not been uniform, far from it. While the sector as a whole has faced pressure, performance has varied widely depending on the positioning and brand equity of individual companies. At the lower end of the spectrum, names like Kering have notably underperformed, weighed down by challenges at flagship brand Gucci and a less distinct positioning in the ultra-premium space. Weak top-line growth, inventory issues, and a muddled brand narrative have made it harder for Kering to defend its valuation in a more skeptical market environment.
By contrast, LVMH, the sector's bellwether, has held up relatively well, broadly moving in line with the market. Its diversified portfolio of brands and strong balance sheet have provided some insulation, but even LVMH has not been immune to macro concerns. Meanwhile, a small group of luxury names has bucked the trend entirely. Hermès and Ferrari have not only defended their premium multiples but actually outperformed their markets. These companies occupy the pinnacle of the luxury hierarchy, what could be termed ultra high luxury. Their scarcity-driven models, impeccable brand control, and nearly unmatched pricing power have enabled them to defy the broader sector's malaise. I highlighted these elements in my article about the emerging luxury trends I wrote almost a year ago.
This divergence underscores a crucial point: the luxury sector is not monolithic. There are distinct segments, and in times of stress, the market becomes highly discerning about which brands truly justify a luxury premium. In this environment, luxury companies that have managed to maintain or even grow their market share stand out as especially well-positioned.
The long-term story remains intact
Despite recent headwinds, the luxury sector continues to present a compelling long-term investment opportunity, underpinned by robust structural drivers and a resilient consumer base. The sector should maintain a compound annual growth rate (CAGR) of approximately 6-8% . This sustained growth is fueled by the sector's ability to adapt to changing consumer preferences and its expansion into emerging markets.
A significant factor supporting this growth is the increasing number of high-net-worth individuals (HNWIs) worldwide. In 2024, the global millionaire population reached 58M, up from 14.7M in 2000, a nearly 300% increase over 2 decades . The United States leads with approximately 22M millionaires, followed by China with 6M and France with 2.9M . This expanding affluent demographic provides a growing customer base for luxury goods and services.
Moreover, the ultra-high-net-worth individual (UHNWI) segment, those with assets exceeding $30M, is also on the rise. As of 2023, the United States had 225k UHNWIs, with China and Germany following at 98k and 29k, respectively . This elite group drives demand for the most exclusive and high-margin luxury products, reinforcing the sector's profitability (and the distinct market trends within each segment). Additionally, emerging markets in Asia, Latin America, and Africa are experiencing rapid growth in their affluent populations, further expanding the global market for luxury goods.
How to invest in the sector
For investors considering a return to luxury stocks, caution and strategy are essential. While the long-term fundamentals remain attractive, the short-term outlook is still fragile. Many stocks in the sector continue to trend downward, and trying to call the exact bottom can be risky. Instead of jumping in all at once, a more prudent approach is to build a position gradually over time, (staggered entry) as I often explain. This allows investors to reduce timing risk and adjust exposure based on how market conditions evolve.
Stock selection is equally critical. The temptation to chase names with the biggest drawdowns can be strong, but this approach often overlooks why those stocks fell in the first place. In many cases, companies that have lost the most have also lost market share, signaling deeper structural problems that may not reverse quickly. Instead, focus on high-quality names that have maintained their competitive edge, brand equity, and pricing power, even in tough times. These firms are more likely to rebound strongly once sentiment turns.
Take LVMH, for instance, a company renowned for its robust leadership, diversified brand portfolio, and long-term strategic vision. Despite its strength, the stock has declined nearly 50% from its ATH and is now approaching key technical support levels, making it a name to watch for potential re-entry.
For those who prefer a diversified and passive approach, luxury-focused ETFs offer a convenient way to gain exposure to the sector without the need to pick individual stocks. These funds typically hold a basket of globally recognized luxury companies, including names like LVMH, Hermès, Richemont, and Ferrari, among others. One prominent example is the Amundi S&P Global Luxury ETF, which tracks the S&P Global Luxury Index and offers access to both consumer discretionary and consumer staples within the high-end space.
To delve deeper into the topic
If you are looking to explore the topic further, these three articles offer valuable insights:
A comparative analysis of 2024 earnings reports from leading luxury brands
An in-depth look at Hermès: strategy, pricing power, and resilience
A deep dive into LVMH: portfolio strength and long-term positioning
