European Luxury Stocks Face Risks as U.S. Consumer Demand Weakens

European luxury stocks are under pressure as weakening U.S. consumer sentiment raises concerns about demand. UBS analysts urge a selective investment approach, warning of potential downside risks to sales and earnings. While U.S. luxury demand exceeded expectations in Q4, uncertainties now loom over consumer behavior.

UBS analysts, led by Zuzanna Pusz, have been cautious about the sector heading into 2025 due to demand fatigue. Even with improving U.S. sales, concerns over consumer spending patterns could weigh on earnings and valuations. Companies with significant exposure to the American market are particularly vulnerable.

Luxury brands with the highest U.S. sales exposure in 2023 include EssilorLuxottica SA (46%), Brunello Cucinelli (37%), and Salvatore Ferragamo SpA (30%). Other brands at risk include Ferrari NV, Kering, Ermenegildo Zegna NV, Richemont, Burberry Group PLC, LVMH, Prada SpA, Hugo Boss, and Hermes International SCA. Recent beneficiaries of strong U.S. demand include Burberry, Salvatore Ferragamo, Richemont, Ferrari, Moncler SpA, Hermes, and LVMH.

UBS forecasts organic sales growth of +4% for the luxury sector in 2025, excluding Hermes, with a recovery anticipated in the second half. However, a sharper slowdown in U.S. demand could threaten this outlook. The sector's valuation has declined, now trading at around 58% of the MSCI Europe index, reflecting lower investor confidence. Unlike other industries, luxury brands are unlikely to benefit from upcoming European fiscal stimulus focused on defense spending.

UBS cautions that a continued U.S. slowdown, coupled with the euro’s recent appreciation, could further pressure valuations and earnings. Investors should remain vigilant as the sector navigates potential headwinds in the coming months.