RBC looks at the set-up for a bruised luxury sector’s latest quarterly earnings

The luxury sector faces significant headwinds from persistent property crisis in China and consumer uncertainty in the U.S. due to tariffs, contributing to a loss of 50 million customers in 2024 and prompting widespread executive and creative leadership changes. Despite a recent 5% gain in luxury shares driven by anticipated Q3 improvements, RBC analysts are not convinced of a broader rebound, forecasting challenging Q4 comparisons and a mid-single-digit growth outlook for 2026 with uncompelling valuations. Consequently, RBC maintains a tilt towards defensive names like Estee Lauder and Hermes, and quality stocks such as LVMH, while rating Swatch 'underperform' due to expected China weakness.

Analysis

The luxury sector is grappling with significant headwinds moving into late 2025, primarily stemming from macroeconomic pressures in its key markets. In China, a persistent property crisis is dampening consumer sentiment, while in the U.S., economic uncertainty driven by aggressive tariffs is curbing spending on non-essential goods. This environment, compounded by post-pandemic price increases, has led to a substantial market contraction, evidenced by a loss of 50 million customers in 2024 according to Bain. In response, the industry is undergoing widespread leadership and creative changes at major houses like Kering, LVMH, and Valentino. While luxury shares have seen a 5% gain over the past month in anticipation of improved Q3 revenue momentum against weaker prior-year comparisons, RBC Capital Markets analysts express caution. They are "not convinced" this signals a sustained rebound, pointing to more challenging Q4 comparisons and a projected mid-single-digit growth outlook for 2026. RBC finds valuations "uncompelling" due to a lack of earnings momentum, leading them to favor "defensive" names like Estee Lauder (EL), Hermes (HRMS), and Ferrari (RACE), and "quality" stocks such as LVMH. Conversely, Swatch (UHR) received an "underperform" rating, with expected weakness in China likely to offset any strength in the U.S., a view supported by its negative per-ticker sentiment score of -0.6.

Key Decisions for Investors

• Investors should adopt a defensive and highly selective posture towards the luxury sector, reflecting the uncompelling valuations and mid-single-digit growth forecast for 2026.
• Consider tilting portfolios toward names identified as 'defensive' or 'quality', such as LVMH, Hermes, and Estee Lauder, which are perceived to have more resilient profiles in the current environment.
• Exercise caution with stocks highly exposed to Chinese consumer weakness, such as Swatch (UHR), which has been explicitly rated 'underperform' due to this specific headwind.
• Monitor upcoming Q3 earnings for confirmation of revenue momentum against easy comparables, but remain wary of a potential Q4 slowdown and scrutinize management commentary on the 2026 outlook for signs of weakness.