Holding luxury stocks has become something of a contrarian investment bet. However, signals that both consumer confidence and earnings growth may be bottoming out suggest the battered sector could be in for some relief. Through May, European luxury names underperformed the broader market by as much as 25%, after which the sector's trajectory steadied. Yet the rebound proved short-lived, with the sector continuing to lag the wider index.

Sales recovery has been slow to materialize, consumer stocks remain broadly under pressure, and shopper sentiment stays subdued. A strategist team at JPMorgan, led by Mislav Matejka, noted: "Interestingly, whenever consumer confidence sits at low levels, much like the current phase, consumer sectors tend to generate excess returns over the following 12 months." They highlighted that luxury is typically among the best-performing segments in such an environment. "Overall, discretionary consumption remains at the epicenter of the storm, with frequent earnings warnings and cautious guidance, but better performance could lie ahead," the strategists said.

According to the strategists, after the University of Michigan consumer sentiment index bottoms out, European luxury stocks have historically outperformed the broader market by an average of 9% and 12%, respectively. Based on a prospective wealth effect, they maintain an overweight rating on the luxury sector globally. They view South Korea as an emerging growth engine, with robust retail sales and the market's business share now surpassing the Middle East. Meanwhile, as the macro environment stabilizes, demand from China is expected to improve gradually.

Luxury sector earnings growth has been sluggish for roughly two years, significantly underperforming the broader market. However, this trend is finally showing signs that the worst may be over, with earnings estimates beginning to point toward a recovery. Christina Carstens, senior fund manager at Piguet-Galland Bank, said: "If a portfolio has absolutely no luxury exposure, one could consider starting to build a position in stages. This is contrarian investing, suited to long-term investors, and returns may take time to materialize."

Even so, the recovery process could remain fragile. An analyst team at BofA, led by Ashley Wallace, said: "Our tracked industry data shows that, on a regionally weighted basis, the global luxury sector's Q3 growth slowed by 3 percentage points compared with Q2 as of 2026 year-to-date; the data has yet to include September, which faces the toughest comparable base." The BofA team added that the slowdown was most pronounced in the US, Japan, South Korea, and Macau, all of which posted strong Q2 results, while EU tourist spending showed greater resilience.

BofA maintains buy ratings on LVMH, Hermès, and Richemont, and states that the recovery in luxury demand will be gradual rather than a linear uptrend. On valuation, the sector has pulled back to near its ten-year average, with a forward price-to-earnings ratio of approximately 25 times. Individual stock dispersion is significant. For instance, LVMH currently trades at a 25% valuation discount to its peers, sitting at the high end of its ten-year range and ranking among the most inexpensive names in the sector. This suggests stock selection will be key.

Investors are no longer chasing diversified conglomerates, instead favoring names with recovery narratives that align with specific trends. For example, the broadly pessimistic household mood is also reflected in spending behavior: consumers still purchasing luxury goods are favoring watches and jewelry over handbags and apparel. Since early April, BofA's hard luxury portfolio has outperformed its soft luxury counterpart by more than 40 percentage points, reflecting the stronger earnings resilience of jewelry firms in the current environment. As a result, Pandora and Richemont, parent of Cartier, have emerged as the best-performing luxury companies in 2026, while fashion giants LVMH and Hermès have underperformed the industry, with shares down 30% and 27%, respectively.