Broker trims sector growth outlook to 5.5% but sees cyclical rather than structural pressure and retains top picks.
Deutsche Bank has cut its luxury sector growth forecast for 2026 to 5.5% from 6.5%, citing the compounding effect of Middle East conflict on a sector that was already grappling with sluggish demand trends.
It follows a mixed run of full-year results and a disappointing Lunar New Year trading period. The sector has fallen between 15% and 25% year-to-date.
Analysts Adam Cochrane, Do-Hyun Yoo, Shwetha Ramachandran and Alison Lygo argue the sell-off reflects cyclical de-rating rather than structural deterioration, and that the growth algorithm underpinning the sector remains intact once macro conditions stabilise.
First-quarter constant-currency sales growth is now forecast at approximately 3%, down from 6% previously, though Deutsche Bank believes this weaker near-term trajectory is already embedded in consensus expectations and current valuations.
The sector is trading at approximately 21 times 2026 calendar-year earnings, excluding Hermes, for expected earnings per share growth of around 10%, which Deutsche Bank characterises as toward the cheaper end of the historical trading range.
Investor sentiment remains firmly negative, the broker notes, suggesting an active sector rotation is under way, but it expects a sharp reversal if macro news flow improves.
The three key growth drivers Deutsche identifies for 2026 are a continued focus on high-net-worth customers, whose spending has remained robust through the recent weakness; new creative directors at several houses injecting fresh product and storytelling to re-engage consumers; and a recovery in Chinese domestic demand alongside ongoing strength from US shoppers.
Inbound tourism to Europe from both American and Chinese visitors is expected to soften, creating a regional headwind even if underlying brand momentum improves elsewhere.
The broker also notes that store estate rationalisation is becoming more visible, citing Kering, Zegna and Burberry as examples, and suggests this trend may accelerate across the sector.
Deutsche's preferred names reflect differing risk appetites: Hermes for its defensive characteristics and pricing resilience, Burberry for a visible operational turnaround, Richemont for what the broker describes as best-in-class top-line growth, and LVMH as the most leveraged recovery play in a more benign macro environment.