The core disagreement in luxury: a cyclical trough or a structural reset

Overview

Ahead of the luxury earnings season, this report frames the core investment debate: was the industry's slowdown over the past two years mainly a cyclical trough from lower comparables, post-pandemic demand overhang, and China's adjustments, or a structural reset in growth drivers. Morgan Stanley says the market remains split between these two views, and any 1H26 improvement needs to separate comparable-base effects from true volume and customer trends to assess quality.

Core views

The bullish view emphasizes a clearer path for comparables, still-steady U.S. demand, a slow inflection in China, creative refresh potentially adding incremental demand, and AI wealth effects and GLP-1-driven wardrobe updates that could support luxury consumption. The bearish view highlights that the industry has lost genuine customers, with Bain-Altagamma data showing luxury customer counts falling from over 400 million in 2022 to around 330 million in 2025; meanwhile, handbag prices rose more than 75% from 2019-2025 and some Chanel styles rose over 100%, damaging the balance between price and perceived value. The report says the earnings season itself is not sufficient to decide, and the key is whether sales volume and customer trends truly recover, especially whether China can turn from a drag into a sustainable tailwind.

Analysis framework

The report uses a bull-bear framework to decompose the sector debate, evaluating evidence for cyclical recovery versus structural reset, and treats China consumption, real-estate wealth effects, stock market wealth effects, customer mix, resale/counterfeit markets, pricing elasticity, and high-net-worth resilience as core monitoring dimensions. At the stock level, the report details valuation methods and upside/downside risks for Brunello Cucinelli, Richemont SA, and Ferrari NV.

Methodology notes

• industry_cycle_analysisBull-bear scenario framework

  Comparing cyclical trough versus structural reset

  The report splits the sector slowdown into two interpretations: one is cyclical adjustment driven by post-pandemic demand overhang, destocking, and high comparables; the other is structural downshift from customer loss, pricing overhang, resale substitution, counterfeit culture, and luxury fatigue.

• Valuation methodsBlend of DCF and P/E multiples

  Brunello Cucinelli valuation method

  The report discloses using a 15-year DCF and P/E multiple blend for Brunello Cucinelli, with DCF assumptions of 8% WACC and 2.5% terminal growth, and the P/E method referencing relative luxury peers and Hermès historical multiples.

• Valuation methodsDCF

  Richemont valuation method

  The report discloses a DCF valuation for Richemont to reflect the company’s profit-margin potential and cash flow, assuming an 8.4% WACC and 2.5% long-term growth rate.

• Valuation methods10-year DCF

  Ferrari valuation method

  The report discloses Ferrari target price as derived from a 10-year DCF valuation method, assuming a 7.5% WACC and 4.5% terminal growth.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Brunello Cucinelli (BCU.MI)

  A high-end luxury proxy, which the report says is more tied to affluent clients and the higher-end K-shaped consumption segment.

  Strengths

  Stronger brand appeal, category expansion, operating leverage and margin expansion, and a weaker euro could all be upside factors.

  Weaknesses

  Relatively high dependence on brand buzz and founder prominence.

  Comparison

  The report classifies it as one of the stocks more exposed to the high-end consumption end and relatively benefitting from affluent-client resilience.

  Risks

  Decline in brand attractiveness, key-person risk, and euro strength.

• Richemont SA (CFR.S)

  A high-end jewellery and watch-related proxy, included in the preferred list with more high-end clientele bias.

  Strengths

  Could deliver EPS growth if efficiency gains materialize; Cartier watch and jewellery sales outperforming expectations is an upside factor.

  Weaknesses

  Further deterioration in the watch business would weigh on performance.

  Comparison

  Compared with more mass-market luxury brands, Richemont is more dependent on high-end jewellery and affluent-client demand.

  Risks

  The biggest risk is a meaningful slowdown in the U.S. together with meaningful slowdown in China; continued deterioration in the watch segment.

• Ferrari NV (RACE.MI; RACE.N)

  A proxy with high exposure to high-end and high-net-worth consumption, and listed among stocks supported by affluent-client resilience.

  Strengths

  Strong backlog, unexpected new products, F80 ramp-up, stronger-than-expected Luce results with new customer appeal, and valuation multiples reverting to historical premium.

  Weaknesses

  High-end auto demand, residual values, and manufacturing execution are sensitive to performance.

  Comparison

  Compared with traditional luxury peers, Ferrari is more directly exposed to high-net-worth clients and scarce premium brand attributes.

  Risks

  Weak demand or weak residuals, production issues, F80 execution risk, elevated exposure to European HNWI demand, tariffs, EV execution, and potential P&L impact.

• Luxury sector / Brands coverage

  Core subject of the industry research

  Strengths

  Lower comparables, resilient U.S. demand, potential stabilization in China, AI-driven wealth creation, new creative cycles, and long-term expansion in emerging markets.

  Weaknesses

  Declining customer base, overuse of pricing power, pressure on entry-level customer segments, and a slowdown in traditional growth engines.

  Comparison

  The report compares the current cycle with the broad demand expansion period of 2000-2019, the downturn phase of 2013-2016, and post-real-estate consumption recovery in Japan.

  Risks

  Nonlinear China recovery, persistent real-estate wealth drag, resale and counterfeit substitution, luxury fatigue, and consumer spending shifts toward health, longevity, and experiential spending.

Key data

• Luxury customer universeover 400 million in 2022, around 330 million in 2025Bain-Altagamma data; the report says about 80 million customers were lost.
• Price increase of selected Chanel core stylesover 100%Used as evidence that pricing power may have been overshot.
• Price increase in most luxury handbagsover 75% from 2019-2025The report states this rose beyond perceived value improvement.
• Global pre-owned luxury market sizeabout €50bn, growing 4-6%The report sees resale and counterfeit culture as structural, not cyclical, pressure.
• Relative size of Chinese second-hand marketaround 10% of primary market, moving closer to about 30% like JapanThe report sees this as weakening scarcity and pricing power.
• Change in China A-share market capup about RMB+10trn year to dateThe report says stock-market wealth effects are starting to offset but not yet fully offset real-estate drag.
• Change in China housing asset valuedown about RMB-6trn cumulativelyThe report says real estate remains the dominant determinant of Chinese household wealth.
• Global UHNWIs551k in 2021 to 713k in 2026Knight Frank Wealth Report 2026; the report says 162k additions over five years, about 89 people crossing the US$30m threshold each day.
• Knight Frank forecast for UHNWIs by 2031an additional 235k, about 129 per dayThe report sees this as potential support for ultra-high-end luxury consumption.
• Six-emerging-market luxury demandabout €34bn, versus about €42bn in ChinaKering CMD cites the Middle East, India, Southeast Asia, Brazil, Mexico, and Nigeria, and the report says diversification potential will still take years to materialize.

Impact & implications

The investment implication is that short-term earnings improvement does not necessarily equal structural recovery; investors need to distinguish apparent growth from a lower base versus genuine customer and sales recovery. If Chinese foot traffic and consumption continue to rebound, entry-level products resume volume drivers, and creative refresh independently lifts demand, this points to cyclical recovery. If resale and counterfeits continue to siphon demand, store net openings weaken in Europe and China, and sector commentary remains focused on pricing and value perception issues, it points to a structural slowdown. In portfolio terms, the report is relatively tilted toward higher-end names with stronger support from affluent clients, including Ferrari NV, Richemont SA, and Brunello Cucinelli.

Risks

• China's real estate market continues to drag household wealth, delaying recovery until after H2 2027.
• Aspirational and lower-middle-income segments may not recover to prior engines of sales growth due to employment, wage confidence, and AI-related white-collar pressure.
• The resale market and counterfeit culture in China and globally continue to erode the primary-market customer funnel, scarcity, and pricing power.
• Previous large price hikes damaged pricing and perceived value, structurally increasing price elasticity.
• Luxury fatigue and over-commercialization weaken brand attractiveness.
• White-space store expansion room in core European markets is limited, with some demand shifting to more affordable luxury brands such as Coach, Poléne, and Ralph Lauren.
• Consumer wallet share is shifting toward health, longevity, and experiential luxury, particularly squeezing entry-level luxury.

What to watch

• Whether 1H26 earnings improvement is driven by genuine sales and customer return, rather than only a low comparable base.
• Whether Chinese foot traffic and consumption improve for multiple consecutive quarters and are not only reliant on stock-market wealth effects.
• Whether the sector can sustain sales recovery through more affordable entry-level products and assortment adjustment.
• Whether growth in the resale market is expanding the customer funnel or cannibalizing the primary market.
• Store rationalization trends in China's tier-2 and tier-3 cities and net opening trends in core European markets.
• Whether management commentary in the sector changes regarding pricing, value perception, and sales recovery.
• Whether the timing of stabilization in China real estate shifts beyond H2 2027.
• Whether creative director transitions can independently lift demand rather than only create short-term marketing excitement.