For the first time in three years! UBS has upgraded the luxury goods industry rating to "Overweight"

UBS has upgraded the luxury goods sector rating to "overweight" for the first time in over three years, marking a significant shift in the institution's attitude towards this long-pressured sector. UBS analyst Andrew Garthwaite, in the 2026 outlook report, raised the luxury goods sector rating to "overweight," primarily due to improvements in fundamentals, valuation support, and enhanced macroeconomic factors. Analysts believe that high-income consumers will benefit from the wealth effect brought about by rising stock markets, cryptocurrencies, precious metals, and real estate prices, with wealth growth in the U.S. market particularly likely to significantly boost luxury goods sales. UBS expects that if only 0.5% of the wealth growth in the U.S. stock market in 2026 is spent on luxury goods consumption, it will bring about a sales growth of approximately 7% for the sector. On July 1 of this year, UBS had upgraded the luxury goods sector rating from "underweight" to "benchmark allocation," and this further increase to "overweight" shows a significant enhancement in the institution's confidence in the industry's prospects. For more than four years, global consumer confidence has been lacking, overshadowing the market. During this period, European luxury goods stocks have been trapped in a range-bound fluctuation, failing to show the upward trend seen in technology stocks. The institution believes a breakthrough may occur in 2026. (A basket of European luxury goods stocks from UBS) Fundamentals and Valuation Support Rating Upgrade Garthwaite listed several reasons for the rating upgrade in the report. First, earnings per share have returned to trend levels, having previously been 100% above trend. Second, capital expenditures are currently below trend levels, indicating that future profit margins are expected to improve. In terms of expectations, earnings per share and revenue forecasts are currently at the lower end of the range but are improving. UBS predicts that earnings per share in the luxury goods sector will be 5% higher than the market, while the market consensus is only 2% higher. The sector has shown signs of margin improvement for the first time since 2022. In terms of valuation, luxury goods stocks, excluding Hermès, have relative price-to-earnings ratios at moderate levels, only slightly above their normal 32% P/E premium. According to UBS HOLT analysis, the implied cash flow return rate and growth rate have only a 1.3% and 1.5% premium over the market, sitting at the bottom of the historical range. U.S. Wealth Effect as a Key Driver The U.S. market is seen as an important driver of growth for the luxury goods sector. The report points out that a quarter of the business in the luxury goods sector is related to the U.S. If only 0.5% of the wealth growth in the U.S. stock market in 2026 is spent on luxury goods consumption, it will increase sales by approximately 7%. The wealth effect brought about by rising gold prices cannot be ignored either. This year, the wealth growth generated by gold has been three times that of Bitcoin losses. Additionally, according to data from the U.S. Congressional Budget Office, the top 10% of households will benefit $12,000 annually from related policies. U.S. Treasury Secretary Yellen has also pointed out that the outlook for low-income consumers is brighter in 2026 Macroeconomic Environment and Luxury Goods Demand The trend of the US dollar is crucial for the luxury goods industry. UBS predicts that the US dollar will strengthen after the first quarter, which statistically benefits the luxury goods industry with high dollar exposure. Garthwaite emphasizes that high-end luxury goods often manage to avoid the disruptive challenges faced by other industries, including the impacts of generative artificial intelligence, weight loss drugs, and government cuts to healthcare budgets. The rapid growth of the middle class in emerging markets will also boost demand for products that signify status. As an indicator of high-end consumer spending, casino stocks in Macau, China, have slightly outperformed the market this year