Investors prevent "killing performance", European luxury stock performance fell first as a sign of respect

Investors are preparing for the difficult earnings season that luxury goods manufacturers are about to face. Due to escalating geopolitical tensions and uncertain prospects for Chinese consumption demand, a basket of luxury goods stocks under Goldman Sachs has fallen 8.1% this year, erasing most of the gains from the past two quarters. Analysts previously predicted that after two years of stagnation, the luxury goods industry would resume growth in 2026, but the current stock price trends are worrisome. Sam Glover, a fund manager at EFG Asset Management, said, "Investors are concerned that the expected profit recovery will be further delayed. We have seen speculative buying in some luxury brands decline in the fourth quarter of last year." French luxury giant LVMH will announce its fourth-quarter performance on Tuesday, which will be another test for the overall industry development. The other two large luxury goods companies in France, Kering SA and Hermes International, will release their financial reports on February 10th and 12th respectively. Despite declines in stock prices this year, all of these stocks are still higher than their lows in 2025, with Kering SA performing particularly well, up by 75%. In April of this year, President Trump revoked the toughest tariff proposal, leading to optimistic sentiment in the market. The Goldman Sachs luxury goods index surged by 26% from its low point in April to mid-November, then traded sideways for over a month. However, a new round of trade tensions this month once again led to a sharp decline in stock prices. Data shows that profits for LVMH, Hermes, Kering, and Moncler SpA in the fourth quarter are expected to decrease by an average of 6.1%, far below the expected growth of 1.3% for the MSCI Europe Index during the same period. The key of this earnings season is whether these companies have confidence in achieving a profit rebound in 2026. For investors, the recovery of the luxury goods industry is crucial. Luxury goods stocks have long been seen as "Europe's large-cap tech stocks": large in scale, rapidly growing, and with a sound business model. However, since the rise in interest rates in 2022 and weakening demand in China, luxury goods stocks have underperformed the broader market. Last week, Trump abandoned plans to impose tariffs on European countries over the Greenland issue, providing some relief to the industry and alleviating concerns about sales in the American market. Analysts believe that North America will be a crucial driver of growth this year. Analysts will focus on LVMH's performance to determine whether the new creative director of its fashion houses and long-awaited store initiatives will improved profitability this year. Industry performance so far this quarter has been mixed. Sales figures reported by Richemont, the parent company of Cartier, exceeded expectations, but traders sold off its stocks due to weak demand in mainland China, as well as exchange rate fluctuations and rising raw material costs. Burberry Group Plc, a UK trench coat manufacturer undergoing transformation under a new CEO, saw its stock rise on the day of its financial report release due to strong sales performance in Greater China, but then declined. Deutsche Bank analyst Adam Cochrane stated that LVMH's performance will provide a clearer perspective, "but the current situation is that the growth rates for most luxury brands in China are expected to slow down compared to the previous period." Analysts expect organic sales in the company's core fashion and leather goods division to have declined by 2.9% in the fourth quarter. Bank of America analysts predict a rebound in growth for the entire industry this year, with revenue expected to increase by 5%, and a projected decrease of 1% from 2023 to 2025. They note that the period of downward revisions in profit expectations by analysts has paused, driving the upward trend in the second half of last year. JPMorgan analyst Chiara Battistini said, "As investors withdraw from the stock market and expectations for the recovery of the Chinese economy become more realistic, we believe the risk-return of the remaining reports is healthier." The Chinese New Year holiday is a critical period for luxury goods sales, usually falling in late January or early February, which means that company executives can comment on trends they have observed during the earnings conference calls. Analysts point out that as tariff-related pressures gradually dissipate, luxury goods manufacturers are expected to achieve a gradual recovery in profitability under limited price increases and a shift towards volume-driven growth. A more resilient market sentiment and early signs of a recovery in Chinese consumption will support the performance of high-end companies in 2025, outperforming entry-level companies. Brands chasing fashion trends and entry-level luxury brands face a long-term dilemma of low demand, with consumer confidence remaining weak. Another reason investors are cautious about the industry is its high valuation. Although the forward price-to-earnings ratio has fallen from its peak in nearly four years, trading prices for luxury goods stocks are still 74% higher than the STOXX 600 index, far above the average. Ashley Wallace, an analyst at Bank of America, said in an interview, "The key information is: don't rush. The market has already digested a lot of information, and the form of global luxury goods demand recovery remains unclear."