Middle Eastern Capital Faces Fire, Luxury Giants Suffer: Can Even Hermès Hold On?

The dual squeeze of Middle East geopolitical conflict and internal industry pressures has triggered a rare collective sell-off in the European luxury sector.

This week, first-quarter sales data released by the three luxury giants—Hermès, Kering, and LVMH—all disappointed the market, causing sector stock prices to plunge sharply.

Prior to this, investors had already begun reducing positions in the luxury sector due to escalating tensions in the Middle East. The logic is that if regional conflicts expand, ultra-premium discretionary consumer goods will be the first to be cut by consumers.

(YTD, luxury stocks have continued to decline, underperforming the broader Euro Stoxx index)

This wave of selling reflects deep market concerns about whether the entire industry can achieve recovery by 2026 after nearly two years of stagnation.

In recent years, the aggressive pricing strategies adopted by luxury brands have caused substantive harm to demand, and the current combined impact of geopolitical and macroeconomic factors makes this recovery outlook even more uncertain.

However, analysts believe that market panic may have gone too far, especially for the strongest names within the sector, where the current drop may already present an entry opportunity.

Hermès Halo Fades, "Moat" Model Questioned

Hermès, traditionally seen as the "anchor" of the luxury sector, has also failed to escape unscathed this time.

First-quarter data shows weak demand in China and a significant slowdown in growth for its core handbag segment.

Deeper market concerns revolve around whether Hermès' unique business model is loosening.

This model has long encouraged customers to make large purchases in other categories at stores as a prerequisite for gaining access to Birkin and Kelly bags. If the appeal of this mechanism declines, a re-pricing of Hermès' moat becomes inevitable.

From a valuation perspective, Hermès' current stock price trades at roughly a 20% discount to its 10-year average P/E ratio. Given that the stock has historically been viewed as a defensive asset within the industry, such a discount is quite rare.

Supporters argue that Hermès' customer base is highly concentrated among ultra-high-net-worth individuals, whose spending willingness is minimally affected by oil price fluctuations; only a stock market crash would truly suppress their consumption.

But so far, this scenario has not materialized, with the S&P 500 Index setting a new all-time high on Wednesday, April 15.

(Wednesday, the S&P 500 closed up 0.8%, reaching a record high)

LVMH Awaits New Designer "Rescue," Kering's Transformation Still a Long Road

Investors remain cautious regarding LVMH, the world's largest luxury group.

Market attention is focused on whether the new collection by Dior's designer Jonathan Anderson can boost sales in the fashion and leather goods segments, which contribute nearly 80% of LVMH's operating profit.

Until the new collection yields substantive results, the group's overall performance is expected to remain sluggish. LVMH's current stock price trades at approximately a 15% discount to its 10-year average P/E ratio.

Gucci, under the Kering Group, faces an even more severe situation.

First-quarter sales fell 8% year-over-year. While the new collection by designer Demna resonated well in the US market, it failed to generate similar traction in other major markets.

Luxury Stock Divergence Intensifies, Some Tickers Already Offer Value Opportunities

Amid a broad downturn, divergence in individual luxury stock performance is emerging, providing grounds for selective positioning.

Prada currently trades at a P/E ratio of approximately 12 times expected earnings, hitting a historic low since its 2011 listing, compared to a historical average valuation of around 28 times.

Brunello Cucinelli saw a recent rebound driven by 14% sales growth in the first quarter, though its stock price still trades at a discount relative to its historical normal valuation. Its positioning as "quiet luxury," favored by Silicon Valley tech billionaires, provides certain differentiated support.

By contrast, transformation narratives for Kering and Burberry are harder to sell convincingly.

Both companies saw their stock prices rise significantly last year due to optimistic expectations about brand revitalization prospects, but until clearer signals of transformation success emerge, the risk-reward profile remains asymmetric.

However, analysts argue that while the confluence of multiple short-term headwinds delays the recovery timeline, it has not fundamentally altered the long-term logic of the luxury industry.

For investors with higher risk tolerance, the core bet on luxury stocks lies in the fact that human desire for top-tier consumer goods will not remain dormant forever. The question is simply how much patience is required to wait for this greed to reignite.