Before the earnings season, luxury stocks are facing a wave of sell-offs. What are investors worried about?

Luxury goods stock investors are preparing for the upcoming challenging earnings season. This year, escalating geopolitical tensions and concerns about consumer demand have triggered significant sell-offs in the sector, erasing most of the gains from the second half of last year. The market is becoming increasingly cautious about whether the industry can achieve the expected profit rebound in 2026.

Geopolitical and trade tensions are the direct drivers of recent market volatility. This month's newly emerged trade tensions have led to another drop in stock prices, although the situation slightly eased last week when U.S. President Trump abandoned tariff threats against European countries. Analysts view the North American market as an important growth driver this year, but uncertainty remains.

Market focus is quickly shifting to the upcoming intensive earnings reports from luxury goods companies. French giant LVMH will announce its fourth-quarter results on Tuesday, becoming the next litmus test for the industry's health. Kering and Hermès International will release their earnings reports on February 10 and 12, respectively. These reports will reveal the real pressures facing the industry.

Earnings Season as a Key Stress Test

According to data compiled by Bloomberg Industry Research, LVMH, Hermès, Moët Hennessy Louis Vuitton, and Kering are expected to see an average decline of 6.1% in fourth-quarter earnings, far below the expected growth of 1.3% for the MSCI Europe Index during the same period. The key question for this earnings season is whether companies have enough confidence to achieve a profit rebound in 2026.

Deutsche Bank analyst Adam Cochrane pointed out that LVMH's performance will provide a better perspective. Analysts expect that LVMH's core fashion and leather goods division may see organic sales decline by 2.9% in the fourth quarter.

High Valuations and Tug-of-War Over Earnings Expectations

Another reason keeping investors cautious about the sector is its high valuations. Although forward price-to-earnings ratios have retreated from near four-year highs, luxury goods stocks still carry a premium of 74% relative to the STOXX Europe 600 Index, which is above the average level.

Bank of America analyst Ashley Wallace emphasized key information in an interview: “Don’t rush. The market has already digested a lot of expectations, but the specific shape of the global luxury goods demand recovery still has low visibility factors.”

Divergent Performance Within the Industry, Long-Term Growth Logic Under Scrutiny

Luxury goods companies that have reported earnings this season have had mixed reactions. Richemont, the parent company of Cartier, reported better-than-expected sales, but its stock was still sold off due to profit margins being squeezed by rising exchange rates and raw material costs. Burberry, which is in a transformation phase, saw its stock price rise on the earnings report day due to better-than-expected sales in the Greater China region, but it later gave back those gains.

J.P. Morgan analyst Chiara Battistini believes that as investors withdraw from the sector and expectations for recovery in China become more realistic, “we feel that the risk-reward situation is healthier during the remaining earnings release period.” Bank of America analysts expect the industry to see accelerated growth this year, with revenues projected to increase by 5%, compared to a decline of 1% between 2023 and 2025 For investors, whether the industry can recover is of great significance. For many years, luxury stocks have been seen as Europe's response to the "tech giants": large high-growth companies with resilient business models. However, since interest rates surged in 2022 and consumer demand began to weaken, the sector has consistently underperformed the broader market. The performance of the current earnings season will test whether this long-term growth narrative still holds true