Key Takeaways
- Luxury goods stocks posted mediocre first-half results, which explains the sector’s underperformance on stock markets.
- However, results could improve by 2026.
- Many shares now look attractive.
The disappointing first-half results of luxury stock LVMH MC have done little to dispel investors’ doubts about a possible recovery in the ailing sector. But with several stocks in the sector now trading at significant discounts, and hopes for a more positive 2026, the question arises as to whether investors should be interested in the sector again.
Since the start of the year, the Morningstar Global Luxury index has fallen by 12.8% in euro terms, compared with a 0.4% decline for the Morningstar Global Markets index.
The decline in the luxury goods index reflects the continued deterioration in fundamentals this year, against a backdrop of high macroeconomic and political uncertainty, marked in particular by US President Donald Trump’s tariff policy and fears of a slowdown in the global economy.
What explains the underperformance of luxury goods?
After enjoying a boom in luxury goods consumption until the end of the pandemic in 2023, most luxury groups, with a few exceptions, have seen their business slow sharply, as even cash-rich luxury goods consumers have become increasingly price-sensitive due to the sharp rise in inflation.
The results for the first half of 2025 confirmed this downward trend, which, according to Morningstar equity analyst Jelena Sokolova, is unlikely to reverse any time soon.
“US demand remains volatile and Chinese demand is not yet improving significantly, with trends broadly similar to those seen in the first quarter. Profitability is under pressure, which is not surprising given high fixed costs and falling revenues,” she explains.
LVMH is one of the most emblematic examples of the difficulties facing the sector. In the first half of the year, the world leader in luxury goods saw its sales at constant exchange rates fall by 4%, with a 7% decline in its Fashion and Leather Goods activity, which includes brands such as Louis Vuitton, Christian Dior, Céline, Loewe and Loro Piana. In the second quarter, this division, which is the biggest contributor to LVMH’s sales and earnings, recorded a 9% drop in activity.
This poor performance largely explains the 27% fall in LVMH’s share price since the start of the year.
Other luxury brands fared better, such as Hermès International RMS and Richemont CFR, both of which benefit from ultra-high-end positioning, their products being purchased by wealthy customers and therefore less sensitive to price or economic conditions.
Recovery from 2026
Despite the pressure on sales, however, there is hope, as a recovery could occur over the next few quarters, according to Ms. Sokolova.
“Historically, downturns in the luxury sector have lasted between one and two years. We’re currently in the second year of weakness, so I’m maintaining my baseline scenario, which calls for a recovery in 2026,” she explains.
“Catalysts for a recovery in demand would be the stabilization of real estate markets in China and improved consumer sentiment in China. US demand could also bottom out and start growing again if the stock market remains supportive and the US stimulus package continues to support consumers,” she adds.
In China, economic growth reached 5.4% in the first quarter, driven by exports (+6.9%) and, to a lesser extent, domestic consumption (+4.6%). In the United States, activity is slowing, but the prospect of lower interest rates could provide some support.
Where are the opportunities?
For investors seeking exposure to the sector, Ms. Sokolova recommends four companies in particular: LVMH, Kering KER, Richemont and Swatch Group UHR.
With the exception of Richemont, which posted solid growth for the quarter ended June 30, the other three companies in the sector are in a slightly more complicated financial situation, particularly Kering and Swatch.
LVMH, which has a particularly strong balance sheet and a broad portfolio of brands, has already begun working to preserve its margins while investing to support its most troubled brands, such as Dior.
Kering has made several changes to the management of its brands and the Group, with the recruitment of Luca de Meo, formerly with Renault, to turn around most of its luxury brands, starting with Gucci, which has suffered from a decline in Chinese and American customers.
Like Kering, Swatch also finds itself in a delicate situation due to its high exposure to China. In the first half of the year, the luxury goods group’s sales fell by 7% at constant exchange rates. Management is hoping for a recovery in sales in China, its main market, in the second half of the year, thanks in particular to lower wholesaler inventories.
In the luxury sector, other listed companies are currently showing discounts, including Prada 01913, Hugo Boss BOSS and Salvatore Ferragamo SFER.
Morningstar, 2025 - The information contained herein is for educational purposes and is provided for information purposes ONLY. It is not intended to and should not be construed as an invitation or encouragement to buy or sell any security mentioned herein. All comments are the opinion of the author and should not be considered as a personalized recommendation. The information in this document should not be relied upon as the sole source for making an investment decision. Please contact a financial advisor or a financial professional before making any investment decision.
