European luxury goods more fragile than ever

Hopes of a recovery in the luxury goods sector are fading as turmoil in financial markets, fanned by Donald Trump's new tariffs, raises fears of a global recession. This uncertainty undermines expectations that affluent American consumers could compensate for weak Chinese demand.

A Wall Street analyst is now forecasting a 2% drop in global luxury goods sales this year, compared with the previous 5% growth forecast. If confirmed, this would be the sector's longest recession in over twenty years.

Luca Solca, analyst at Bernstein, attributes this revision to the shock caused by the April 2 announcement of US tariffs targeting several major trading partners. "Uncertainty and the likely further fall in stockmarkets are creating a self-fulfilling prophecy: a global recession," he writes in a note to his clients. The scale of the taxes decided on by Trump exceeded market expectations and prompted retaliation, notably from China, triggering a trade war that sent stockmarkets reeling.

Since the start of the year, LVMH 's share price has fallen by 2%, while Kering, parent company of Gucci, has plunged by 31%. Richemont, owner of Cartier, and Hermès, whose clientele is perceived as more resilient, have lost 6% and 8% respectively.

"Mario Ortelli, managing partner of Ortelli & Co, a firm specializing in luxury goods, points out that "the price turmoil is heightening concerns: it's not helping the morale of luxury consumers."

LVMH will open the quarterly publication ball on April 15. The big names in fashion and jewelry, such as Louis Vuitton, Chanel and Cartier, were counting on wealthy American buyers to offset the persistent weakness of the Chinese market.

"Everything seemed perfectly aligned" at the start of 2025, notes HSBC analyst Erwan Rambourg, with rising stockmarkets, dollar, cryptocurrencies and US consumer confidence.

But the first signs of weakness appeared even before Trump's announcements. Data from Citi released on Tuesday showed that credit card spending on luxury brands was down 5% year-on-year in February and March, after two consecutive months of growth.

In early April, analysts at Vontobel were already warning of a form of "luxury fatigue" and a deterioration in US consumer morale.

The stockmarket shock of the new taxes could prove decisive, in a country where a large proportion of wealth is directly linked to the performance of the financial markets.

Groups such as LVMH, Kering and Richemont are likely to rely on their pricing power to preserve their margins in the face of tariffs. However, investors are worried that consumers, even wealthy ones, will become more cautious in the face of a gloomy economic climate. In this situation, tariff policy, already complex after the record increases seen during the pandemic, is becoming a balancing act, says Mario Ortelli, as buyers are now "more attentive, scrutinizing their spending".

US taxes of 20% on European products and 31% on Swiss goods are likely to push luxury houses to increase their prices in the US by an average of around 6%, UBS said.

Gucci, Chanel and Cartier have already raised some prices in March (by 5% to 6%), Citi says, which anticipates further high-digit increases in the coming weeks.

In the absence of price adjustments, Barclays forecasts a 1.5% drop in operating income for LVMH's fashion and leather goods division, and a 2.4% drop for Prada and Hermès. Kering could suffer an 8.7% drop, due to Gucci's limited leeway in the midst of a major overhaul, while Swiss-based Richemont would see its results fall by 7.1%.

The United States is the leading market for the Swiss watch industry, with exports more than double those to China last year, according to the Federation of the Swiss Watch Industry.

The European luxury sector had been spared taxes during Donald Trump's first term (2017-2021), despite heightened trade tensions. This time around, executives are hoping that Bernard Arnault, chairman and CEO of LVMH and present at Trump's inauguration in January, will be able to leverage his relationship with the American president to secure exemptions.

Arnault, who began his career in real estate in New York in the 1980s, like Trump, spoke as recently as January of a "wind of optimism" in the United States, in contrast to the "cold shower" of taxation in France. LVMH declined to comment on Arnault's current view of the US market.

A sluggish start to the year

First-quarter results should show growth in the luxury goods sector slowing down to 0.5%, compared with 3% at the end of last year, according to HSBC, based on forecasts drawn up before the recent stockmarket rout.

LVMH's fashion and leather goods division is expected to post stable sales, according to the Visible Alpha consensus.

Moncler, which will report on April 16, is expected to increase slightly by 1.3%, while Hermès, whose results are due out on April 17, is expected to grow by almost 10%.

However, on April 23 Kering is expected to report almost a 10% drop in sales, weighed on by Gucci, which is still undergoing strategic redeployment.

Even so, these results may prove difficult to interpret. "The last few days have raised a host of additional uncertainties", Jefferies analysts point out, who expect "a minimum of stability" before revising their forecasts for the sector.