Luxury Isn’t What It Used to Be. Here’s How to Play the Stocks Now.

A Louis Vuitton luxury clothing boutique on Parizska Street in Prague. (Milan Jaros/Bloomberg)

The sector still hasn’t recovered from its post-Covid bust, but shares could be set for a bounce.

All that glitters isn’t gold. Luxury stocks are proof.

It doesn’t take an auction of the original Birkin bag, which might soon sell at Sotheby’s for seven figures, to signal that luxury items still have cachet. For investors, though, the luxury sector in recent years has resembled an “it” bag stuffed with tissue paper—glamorous on the outside but coming up empty for shareholders. Companies like Burberry Group and Chanel used the Covid-era boom to raise prices to maintain exclusivity and avoid brand dilution, but then found that they had priced out customers once inflation spiked and people started going out again.

Since then, a combination of weakness in China and hit-or-miss merchandising has led to lackluster results, while tariffs could be a further headwind. LVMH Moët Hennessy Louis Vuitton, which has given up its crown as Europe’s most valuable company, has seen its stock drop about 40% over the past two years, while Gucci owner Kering has fallen more than 50% and Prada has declined more than 10%.

Luxury, though, may be about to shine again. The One Big Beautiful Bill disproportionately benefits the wealthy, according to the Congressional Budget Office, giving the equivalent of a 2.3% tax cut to top earners, who are also getting richer as the stock market rises. Europeans are feeling more confident, and Chinese shoppers are, if not exactly upbeat, at least feeling less gloomy.

All that is good news for luxury, which has seen an uncharacteristic boom/bust cycle in recent years. What’s more, the stocks now look cheaper than they have in years, potentially setting them up for a nice contrarian bounce.

“The main consumer base for this industry probably feels in pretty good shape,” says Markus Hansen, a portfolio manager at Vontobel Asset Management. “Markets are near all-time highs; every asset class is doing well.”

Luxury stocks aren’t out of the woods yet. Many companies are likely to be hit with slowing sales, margin pressures, and a still-disillusioned shopper. The stocks, however, have been punished so much that purely on a valuation level, they are starting to look attractive.

Prada trades for 14 times 2026 earnings, LVMH less than 20 times, and Moncler, Kering, and Richemont not far above 20. Valuations for the group have fallen to a 15-year low relative to the market, according to UBS strategist Andrew Garthwaite. The current valuation disconnect doesn’t happen very often, and when it does, luxury stocks outperform the market 76% of the time over the following one to three months, and 100% of the time over the following six months.

Cheap stocks can always get cheaper, but luxury stocks are also showing signs of earnings stability. Garthwaite notes that earnings revisions have edged higher, even though profits are expected to decline. What’s more, the stocks have fallen far more than earnings are expected to. If earnings can surprise to the upside, the stocks should have room to run.

It’s “time to be less negative,” Garthwaite writes.

Luxury stocks are like Tolstoy’s unhappy families—each is distinct—and investors would do well to stay picky. For instance, while all luxury companies have some entry-level items—a Hermès International lipstick, a Ferrari keychain, or a Prada candle, for instance—to establish relationships with younger consumers who can go on to become lifelong shoppers, companies whose products are at the highest price points haven’t been hurt as hard by the pullback in so-called aspirational customers.

“Luxury isn’t dead, but the person who had been propping it up since 2020 is now priced out,” says Gabriella Santaniello, founder and CEO of retail consulting firm A Line Partners. “But the true luxury customer, who enjoys it and can afford it, is still buying.”

Hermès looks particularly interesting, according to HSBC analyst Erwan Rambourg. The company, whose perch atop the handbag food chain is undisputed thanks to its iconic Birkin and Kelly bags, looks set to grow sales by 9% during the second quarter, a rare sequential improvement among the luxury-goods purveyors. Hermès has been so successful that it is now valued at $302.4 billion, greater than LVMH’s $298 billion. Rambourg rates shares a Buy with a 2,800 euro price target, up 15% from a recent €2,434.

Cartier owner Richemont also looks like a big winner. The company posted its highest-ever quarterly sales for the December quarter, and should likely keep the growth up when it reports July 16. J.P. Morgan analyst Chiara Battistini notes that the company has brand momentum and offers “strong value” for the money, two factors that should allow it to “increase prices without losing volumes.” The stock has gained less than 10% over the past 12 months.

Elsewhere, A Line’s Santaniello says she loves Burberry’s recent merchandising decisions. The company has shifted back toward its roots, and a recent ad campaign positions it beyond its typical fall/winter core season. The stock’s 2025 outperformance—it has gained 39%—is a positive sign that its turnaround is finally taking hold, after it raised prices too aggressively and alienated its core customers. HSBC’s Rambourg is bullish, too, arguing that the worst is behind the company and it has plenty of opportunity to snap up market share.

In the U.S., Tapestry’s Coach brand has successfully repositioned itself further up the premium scale. That’s rare, given that—much like a social climber—overly ambitious brands can often fail to make the transition to a higher-tiered perception among consumers. Yet it still has plenty of room to price more competitively with European peers like LVMH, and the stock itself, at 17 times 12-month forward earnings, is relatively cheap, too.

Très chic.

Write to Teresa Rivas at teresa.rivas@barrons.com