Luxury's Supercycle Over Analysts Warn as Demand Faces Structural Shift

The luxury sector, accustomed to a three-decade period of robust expansion, is now facing a significant turning point, according to Berenberg analysts. Led by Nick Anderson, their team recently downgraded LVMH to a "hold" from "buy" and Gucci-owner Kering SA to a "sell" from "hold," asserting that the "luxury supercycle is over." Contrary to more optimistic assessments, Berenberg posits that the challenges confronting the industry stem not merely from supply-side issues but represent a fundamental "structural demand problem."

Anderson highlighted several key factors that have fundamentally reshaped the luxury landscape since the "exceptional" 2010s, a decade marked by soaring Chinese demand and strong US spending. These include escalating pressure within the Chinese market, a palpable squeeze on the incomes of aspirational consumers, and significant shifts in the purchasing habits of younger shoppers. Consequently, Berenberg now anticipates a medium-term demand growth of just 2-3% per year for the sector, a stark contrast to the historical norm of approximately 6%.

Ironically, Berenberg's cautionary call coincided with an extraordinary market reaction for LVMH. On the day of the downgrade, LVMH shares experienced their most substantial intraday surge since September 2001. This uptick was spurred by the luxury giant's report of a return to sales growth, a development interpreted by many as an easing of the broader slump in luxury demand. The positive news from LVMH also provided a lift to shares of its rivals, including Kering, though LVMH shares traded steadily the following day.

Adding to the divergent perspectives, UBS Group AG responded by raising its estimates for LVMH, upgrading the stock to "buy" and declaring that "momentum is back" following what it described as "thesis-changing" results. This sentiment was further underscored by a spike in LVMH call option volumes on earnings day, reaching a 16-year high. More broadly, the luxury sector has seen a gauge tracking its performance surge by approximately 20% over the past two months, fueled by a relief rally amid signs that trade tariffs had less impact than initially feared.

Despite this recent surge, the rally has pushed valuations for many luxury companies to "demanding levels," leading most analysts to adopt a cautious stance regarding a definitive recovery. Anderson's analysis, however, delves deeper, distinguishing between "absolute" luxury consumers, whose purchasing power is driven primarily by wealth, and "aspirational" buyers, whose spending is largely tied to income. Berenberg's strategic positioning includes being short aspirational luxury exposure, long absolute luxury, and long sporting goods.

Anderson elaborated on the significant pressures currently impacting aspirational consumers, citing factors such as higher inflation, rising housing costs, uncertain tax burdens, and a growing fear of job losses driven by artificial intelligence. The Berenberg team specifically noted that companies like LVMH and Kering exhibit a greater skew towards these aspirational consumers compared to some of their industry rivals. While potential spending by American consumers could theoretically offset some of the weakness observed in the Chinese market, Anderson concluded that "the short-term outlook is complex and uncertain."