When Will Luxury's Perfect Storm Pass?

The global luxury sector is navigating a "perfect storm" of economic uncertainty, shifting consumer behavior, and geopolitical tensions. Yet, for long-term investors with a contrarian mindset, this storm may be clearing the way for compelling opportunities. As valuations contract, key markets stabilize, and high-margin segments prove resilient, the question is no longer if the sector will recover—but when to act.

The Storm: A Sector in Correction

The luxury market has faced headwinds in 2025, with global sales expected to contract by 2–5% after a 1% drop in 2024, the worst since 2008. Prices for handbags, leather goods, and even high-end watches have surged post-pandemic, leading to "price fatigue" among consumers. In the U.S., tariffs and inflation have dampened spending, while China's market—once a growth engine—contracted for six consecutive quarters. However, these challenges have created a buying opportunity for investors who recognize that luxury is not a cyclical sector but a resilient one, driven by brand equity and pricing power.

Valuations: Contrarian Allure in a Downturn

Current valuations suggest the sector is being unfairly punished. Take LVMH (PAR:MC), which dominates with a 35% share of the luxury market. Its P/E ratio of 18.8 and EV/EBITDA of 9.4 are below its historical averages and the industry median, indicating undervaluation. Kering (PAR:KER), owner of Gucci and Bottega Veneta, trades at an even steeper discount: a P/B ratio of 1.4 versus the industry median of 11. Meanwhile, Christian Dior (PAR:CDI) trades at a P/E of 15.6, far below its peers.

Hermès (PAR:RMS), the sector's standout, commands a premium with a P/E of 53.9 and EV/EBITDA of 33.9. While its valuation appears stretched, its disciplined production model and loyalty among ultra-high-net-worth individuals make it a unique case. For investors seeking balance, LVMH and Kering offer more attractive entry points.

China's Stabilization: A Key Inflection Point

The most critical development in 2025 is the stabilization of China's luxury market. After a brutal 23% decline in 2023, domestic spending is projected to rebound to €57 billion in 2025—a 12% increase. This recovery is supported by government policies promoting "dual circulation," which prioritize domestic consumption. Meanwhile, Chinese consumers are increasingly purchasing luxury goods abroad, with overseas spending expected to reach €26 billion—a 95% jump from 2024.

Brands like Chanel and Cartier are adapting by deepening their cultural resonance. Chanel's Métiers d'Art show in Hangzhou, for example, drove social media engagement and reinforced its status as a "Chinese favorite." Similarly, Kering has optimized its store portfolio in China, focusing on high-potential cities and enhancing VIP services. These strategies highlight how brands are navigating the K-shaped recovery, where high-net-worth consumers remain resilient while mass-market demand lags.

High-Margin Resilience: The New Guard of Luxury

Within the sector, high-margin categories like jewelry, watches, and ultra-luxury handbags are outperforming. Richemont's jewelry division, including Cartier, grew 8% in 2025, while Hermès' Birkin and Kelly bags maintained their pricing power despite weaker macroeconomic conditions. These segments are less sensitive to economic cycles, as they cater to consumers for whom luxury is an emotional investment rather than a discretionary purchase.

Moreover, the secondhand market is reshaping demand. With 50% of Chinese consumers purchasing vintage items in Q4 2024, brands are integrating resale into their strategies. This trend not only extends product lifecycles but also creates new revenue streams, enhancing long-term value.

The Strategic Entry Window

For long-term investors, the current correction offers a chance to buy into a sector that remains fundamentally strong. Key catalysts for recovery include:
1. China's domestic stimulus: As the government continues to push for "high-quality development," luxury spending could normalize by H2 2025.
2. Price harmonization: Brands are pausing aggressive price hikes, reducing the risk of consumer backlash and stabilizing demand.
3. Creative reinvention: A shift toward wearable, culturally relevant designs—rather than logo-driven fashion—is rekindling interest among younger consumers.

The data supports this outlook. Kering's 2026 EPS forecast of €9.01 and revenue target of €15.95 billion, while revised downward, still imply strong growth potential. LVMH's forward P/E of 18.4 suggests it's trading at a discount to its earnings power.

Conclusion: Patience and Precision

Luxury's perfect storm is not a death knell but a recalibration. For investors who can look beyond short-term volatility, the sector's structural strengths—brand loyalty, pricing power, and high margins—are more compelling than ever. While the path to recovery may be uneven, the stabilization of China, the resilience of high-margin segments, and attractive valuations make this a strategic entry window.

As the market awaits the next wave of innovation from houses like Hermès or the reinvigoration of Gucci under creative leadership, patience and precision will be key. The storm may yet pass—but for those who act now, the rewards could be enduring.