The global luxury goods winter is quietly approaching, with LVMH's quarterly decline reaching the largest since the burst of the internet bubble.

Ask AI · How is Middle East geopolitical tension catalyzing a valuation contraction in the luxury goods industry?

The global luxury goods industry is undergoing the most severe market test since the beginning of the new century. LVMH’s share price plunged 28% in the first quarter of this year, marking the largest single-quarter decline since the bursting of the dot-com bubble, making it the worst-performing European luxury stock this year, with the industry’s overall valuation being compressed significantly.

The ongoing escalation of Middle East geopolitical tensions has become the core trigger behind this round of sell-off. Demand across categories such as handbags, footwear, watches, perfumes, and wine has weakened across the board, and dozens of brands under LVMH—including Louis Vuitton, Christian Dior, Fendi, Bulgari, and Moët & Chandon—have all been affected.

At the same time, Richemont fell 20%, Hermès dropped 25%, and the overall valuation of the luxury goods sector is about 15 percentage points below its long-term historical average.

Over the past quarter, LVMH CEO Bernard Arnault’s personal wealth has evaporated by approximately $55.4 billion, the largest drawdown among the world’s top 500 richest individuals.

Multiple Concerns Facing LVMH Itself

This round of sell-off not only reflects macro-level uncertainties, but also exposes multiple concerns at the company level for LVMH.

According to UBS analyst Zuzanna Pusz, in a client report to customers on Tuesday, LVMH is currently facing threefold pressure: weak guidance on January performance, greater exposure of its brands to customer segments with relatively limited consumer purchasing power, and the continued slump in its wine and spirits business—especially the weak performance of Hennessy.

With these factors compounding, LVMH’s share price is currently trading at a 20% discount versus its peers, making it a valuation trough within the industry.

In the first quarter of this year, LVMH’s 28% decline exceeded the largest single-quarter drop seen during the COVID-19 pandemic as well as during the 2008 financial crisis, but it has not yet surpassed the historical extreme of 41% in Q3 2001.

Geopolitical Conflict Suppresses Sector Valuations

The valuation compression in the luxury goods industry largely stems from uncertainty at the geopolitical level.

In the report, Pusz wrote that, “Rising global uncertainty has triggered significant anxiety among investors—especially those who previously expected luxury demand to finally recover this year—which has driven a sharp contraction in the entire sector’s valuations.”

She pointed out that the evolution of Middle East geopolitical tensions is the main factor driving the decline in valuations of luxury stocks. Currently, the sector’s overall valuation is about 15 percentage points below the broader market’s long-term historical average.

John Plassard, head of investment strategy at Swiss private bank Cité Gestion, commented:

“LVMH is no longer just a luxury stock; it has now become a barometer of global confidence. The core issue isn’t the Middle East risk exposure itself, but the signals it conveys: uncertainty, pressure on the wealth effect, and fears of a broader economic slowdown.”

Analysts: Sluggish Valuations May Breed Opportunities

Despite the lackluster market sentiment, some institutional analysts have begun to look at the possibility of a valuation rebound.

Goldman Sachs’ European luxury stock basket (GSXELUXG Index) shows that the sector currently seems to have found support near its trading range in 2022.

Pusz said that although the industry outlook remains unclear, she has not yet found signs of a clear slowdown in real demand from the latest channel research—especially in Asian markets. She further noted:

“Against the backdrop of extremely pessimistic market sentiment and persistently low valuations, even a modest first-quarter earnings beat could bring an outsize positive market reaction. From a fundamentals perspective, we continue to expect most companies to improve sequentially, but stock selection remains crucial. Richemont and LVMH are our top preferred targets.”