Trump Tariffs and Inflation Risks in the Luxury Sector: Identifying Undervalued Defenses

The luxury goods sector, long a barometer of global economic confidence, now faces its most turbulent period in decades. Donald Trump's 2025 tariffs—ranging from 10% on general imports to 31% on Swiss watches—have compounded an already fragile market, triggering a projected 2–5% contraction in global salesThe global luxury goods market is forecast to shrink in 2025...^[1]. As affluent consumers delay purchases and brands grapple with pricing pressures, investors must identify undervalued defenses against these headwinds.

The Tariff-Driven Perfect Storm

The Trump administration's “America First 2.0” strategy has disrupted the luxury sector's recovery. Tariffs on European goods, which account for 70% of the global luxury market, have forced brands like LVMH and Kering to absorb or pass on costsAs Luxury Brands Brace For Tariffs, Affluent Consumers Hit Pause^[2]. For example, LVMH's stock plummeted 5.62% in a single session following tariff announcements, erasing $30 billion in market valueSpecial Report: Losses in the Luxury Sector on the …^[3]. Meanwhile, U.S. consumers—responsible for 28% of global luxury spending—have curtailed spending amid fears of a recessionUS tariffs will be test of luxury brands' pricing power^[4].

The psychological impact is equally profound. Affluent buyers, who view luxury purchases as symbols of status and economic security, are now hesitant. Morgan Stanley analysts warn that a “luxury-wide psychological reset” is underway, with 50 million customers lost in 2024 aloneLuxury Goods Outlook: Can It Weather an Economic …^[5].

Resilient Strategies and Undervalued Defenses

Amid this turmoil, certain brands and strategies stand out as potential safe havens for investors.

1. Localized Production: Mitigating Tariff Exposure
Luxury brands with domestic or regional production facilities are better positioned to weather trade wars. LVMH, for instance, has expanded its European ateliers, including new leather goods workshops in FranceWhat are luxury brands doing in the face of trade tariffs?^[6]. Similarly, Hermès continues to invest in French craftsmanship, opening its 21st workshop in 2023As Luxury Brands Brace For Tariffs, Affluent …^[7]. These moves reduce reliance on imported goods and insulate margins from tariff-driven price shocks.

2. Pricing Discipline: Balancing Power and Perception
Brands with strong pricing power, such as Hermès and Richemont, are outperforming peers. While competitors like Gucci and Saint Laurent have relied on aggressive price hikes (33% from 2019–2023), Hermès has maintained exclusivity by limiting price increasesUS tariffs challenge luxury brands' pricing power. in 2025 - Franetic …^[8]. This strategy preserves brand equity and customer loyalty, even as inflation erodes purchasing power.

3. Diversified Markets: Beyond the U.S. and China
Luxury firms expanding into underpenetrated regions are gaining traction. Richemont and LVMH are targeting India, Southeast Asia, and Africa, where middle-class growth offsets U.S. and Chinese market declinesThe State of luxury goods in 2025 | McKinsey^[9]. For example, Prada reported an 18% same-store sales increase in Q3 2024, driven by Asian demandThe Latest Performance of 9 Major Luxury Groups 7 See Revenue …^[10].

4. Niche Resilience: Ferrari and the Ultra-Wealthy
Niche brands catering to ultra-high-net-worth individuals, such as Ferrari, are less vulnerable to price sensitivity. Despite tariffs, Ferrari has raised prices by 2% in the U.S. to offset costs, leveraging its scarcity and brand allureLuxury sector hit hard by tariffs, growth forecast turns negative^[11].

Financial Metrics and Analyst Insights

Financial data underscores these trends. LVMH's Q1 2025 revenue dropped 3% to $23 billion, reflecting U.S. and Chinese market weaknessLVMH Sees Revenues Drop As Tariff Anxiety …^[12]. However, Prada and Hermès defied the trend, showcasing the value of diversified strategies. Analysts from Bernstein have downgraded the sector's 2025 growth forecast to -2%, but note that brands with strong balance sheets and pricing discipline could outperformLuxury sector hit hard by tariffs, growth forecast turns negative^[13].

Conclusion: Navigating the New Normal

The luxury sector's challenges are structural, not cyclical. Trump's tariffs and inflation have accelerated a shift toward localized production, pricing prudence, and market diversification. For investors, the key lies in identifying brands that balance exclusivity with adaptability. While the road ahead remains uncertain, those who recognize undervalued defenses—such as Hermès's pricing discipline or LVMH's atelier expansion—may find opportunities in a market reshaped by volatility.