Are European luxury stocks finally seeing a turnaround? Consumer confidence hits rock bottom, signaling a rebound for the sector, which may outperform the market in the next 12 months.

Holding luxury goods stocks has almost become a contrarian investment trade today, but signs that consumer confidence and profit growth are bottoming out suggest that this battered industry may gain some breathing room. As of May, European luxury stocks lagged the market by as much as 25% before beginning to stabilize. However, the duration of the rebound has been very short, and these stocks continue to underperform. The recovery in sales has proven elusive, leading to a prolonged slump in the overall consumer sector, with consumer sentiment similarly low. However, a team of strategists at JPMorgan, led by Mislav Matejka, stated, "Interestingly, when consumer confidence is at a lowlike it is recentlythe consumer sector tends to outperform the market in the following 12 months." They pointed out that, in such conditions, luxury goods often shine as one of the better-performing industries. "From a broader perspective, the cyclical consumer industry remains at the center of the storm, facing profit warnings and cautious performance guidance, but may see better performance in the future." The strategists noted that after the University of Michigan Consumer Sentiment Index hits bottom, the European luxury industry has historically been able to outperform the market by 9% to 12% on average. This view is based on the potential wealth effect in the future. They believe that South Korea is becoming a growth engine, with retail sales performing so strongly that the importance of the Korean market has now surpassed that of the Middle East. Meanwhile, as the macroeconomic environment stabilizes, demand from China should also begin to improve. Profit growth has been sluggish for about two years, particularly compared to the overall market. However, there are finally signs that the worst is over, with current profit expectations pointing towards a rebound in growth. Christina Carlsten, a senior fund manager at Banque Piguet Galland, stated, "If someone has no exposure to luxury stocks at all, now might be a good time to consider beginning to build a position gradually. This is a contrarian trade, so it suits long-term investors and may take some time to pay off." That said, any recovery may be fragile. A team of analysts at Bank of America, led by Ashley Wallace, noted, "The industry data we track indicates that, based on regionally weighted averages, the global luxury data points as of now show a slowdown of three percentage points from Q2 to Q3 of 2026, and this figure does not account for September, which faces the most severe year-over-year comparison." The Bank of America team added that the slowdown is most pronounced in the United States, Japan, South Korea, and Macau, where these markets exhibited the strongest performance in Q2. In contrast, the EU tourism sector has shown greater resilience. They maintain a "buy" rating on stocks including LVMH, Herms International, and Richemont, adding that the recovery in luxury demand will be gradual, rather than linear. From a valuation perspective, the luxury sector has now returned to near 10-year average levels, with a forward P/E ratio of about 25 times. However, a closer look reveals significant divergence among different companies. For example, LVMH is currently trading at a 25% discount to peers, at the highest level within the past decade, making it one of the most undervalued stocks in the industry. A significant divergence has once again appeared in luxury stocks. This means that investors need to adopt a selective investment strategy. Investors are no longer rewarding diversification but rather favoring recovery stories and specific trends. For instance, the prevailing pessimism among households is reflected in the preferences of consumers still purchasing luxury goodsthey are now more inclined towards watches and necklaces rather than handbags and clothing. Bank of America tracks a basket of high-end luxury stocks, which has outperformed its corresponding basket of soft luxury stocks by over 40 percentage points since early April, reflecting a more robust earnings trend among jewelry companies during wartime. Consequently, Pandora A/S and Cartiers parent company Richemont have emerged as some of the best-performing luxury companies by 2026, while fashion giants LVMH and Herms have lagged behind other companies in the industry, falling by 30% and 27%, respectively. Soft luxury stocks have significantly underperformed high-end luxury stocks. Bernstein analysts Luca Solca and Maria Meita noted, "Jewelry remains one of the most attractive categories within the luxury goods sector, offering higher growth, lower luxury penetration, stronger pricing power, and a wider range of prices compared to most personal luxury categories." The analysts stated that this provides an investment rationale for Richemont, as investors continue to underestimate the companys "structural advantages" relative to the broader luxury industry.