Luxury brands sell the idea of the good life, but their shareholders may feel like genteel poverty is a better metaphor, as the category has fallen some 30% in 2026.
With little hope that the pressure will ease near-term, it may be time to invest in the 1% of luxury brands.
There are a number of factors weighing on luxury companies: While the wealthy are benefiting from a historic bull market and real estate appreciation in the U.S., the high cost of living has blunted demand from "aspirational" customers who sent demand soaring during the pandemic era.
Add in the wars in the Middle East and Ukraine and ongoing weakness in China, and it's clear luxury is fighting an uphill battle.
Still, investors don't have to avoid the sector entirely, argues TD Cowen's Jonna Kim: Just stick to the companies catering to the ultra-rich.
China has always been a major component of the luxury growth story, and with growth moderating, she expects luxury stock multiples to remain below prior peaks. But aspirational customers, who account for about 65% of luxury spending in the U.S.-as much as $70 billion-are also under pressure from years of cumulative inflation, Kim says.
"Louis Vuitton, Dior, and Gucci are most exposed to aspirational clients," she writes in a recent note. "A rebound in this cohort is most critical for LVMH and [Gucci owner] Kering, though it would provide a broader sector tailwind."
That rebound doesn't seem imminent, leading her to favor companies that depend less on middle-income shoppers.
Kim's research shows that Americans with incomes of $150,000 and above account for well over a third of luxury spending, despite being just 22% of purchasers, "reinforcing the disproportionate importance of affluent consumers to category."
Therefore, she prefers "companies with meaningful exposure to resilient top-end demand, complemented by ability to recruit customers without diluting brand desirability," or in other words, those who don't have to lower prices to attract more consumers.
"Jewelry as a category tends to skew less aspirational than handbags or accessories," she says. "We acknowledge gold prices have come down, but we continue to believe demand remains durable."
Not surprisingly then, her top large-cap pick is Cartier owner Compagnie Financière Richemont. The company should benefit from shoppers across the income spectrum shifting toward jewelry and away from handbags and leather goods, while its valuation has come in from highs earlier this year.
Kim's mid-cap favorite is LuxExperience B.V.-ADR, owner of Mytheresa, where she sees strong margins and meaningful earnings upside following its acquisition of Net-a-Porter. Among smaller-cap companies she likes Ermenegildo Zegna, which is also enjoying strong margins as it grows its direct-to-consumer business.
Luxury stocks may remain mired in the trenches near term, but at least some still seem able to outshine their peers.
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