Luxury Outlook: From Contraction to Caution

Recent conversations with European wholesalers and retailers of luxury goods suggest that industry sentiment has improved modestly from late 2025. However, the outlook remains measured rather than overtly optimistic.

Sector participants point to stronger store traffic, a pickup in tourist activity and the arrival of new spring/summer collections as supportive factors early in the year. There are also signs of growing consumer fatigue with “quiet luxury,” an aesthetic that focuses on minimalism instead of prominent branding and flashy colors. 

“Despite these improvements, the recovery remains highly uneven, and experts are clear that the more positive sentiment should not be mistaken for a solid demand recovery. Geopolitics, weak local consumption and patchy tourist flows still weigh on the sector,” says Edouard Aubin, Morgan Stanley’s Head of European Luxury Brands Research. “The industry mood has improved, but remains cautious, rather than outright bullish.”

The arrival of a new wave of creative directors across personal luxury goods brands last year raised expectations that innovation could help reignite demand. Six months later, that optimism has waned.

Morgan Stanley Research now expects the personal luxury goods sector to grow approximately 2.5% in 2026, down from a prior estimate of 4% to 5% made in the Fall of 2025. 

“Investors are now more of the view that the recovery of some of the leading brands could come at the expense of some peers offering less ‘newness,’” Aubin says. “While fashion experts have in general been positive on the creative changes they have seen so far at the leading houses, the reality is that we now expect the personal luxury goods sector to grow less in 2026 than we initially anticipated after two years of contraction.”

Geopolitical tensions, especially the conflict involving Iran, are affecting sales for some global luxury brands, alongside softer tourist spending—particularly in Europe. The Middle East represents roughly 5% of sales for companies covered by Morgan Stanley Research.

“Given the ongoing conflict, we expect regional sales to remain under pressure,” says Morgan Stanley Research analyst Natasha Bonnet. “There is also downside risk to spending by consumers from countries in the Gulf both domestically and abroad.”

Similar to many other industries, luxury brands are exploring the use of artificial intelligence to improve efficiency across back-office functions, e-commerce and targeted marketing, among other tasks. 

“AI can support cost efficiencies, but it does little to offset a potentially weaker core customer,” Bonnet says. “If high-income white-collar employment comes under pressure, concerns about job security could weigh on discretionary spending.” 

China remains the largest market for personal luxury goods, accounting for about 30% of global consumption, followed by the U.S. at roughly 22%. Industry feedback suggests sales in China grew in the low- to mid-single digits in the first quarter, following declines in 2024 and 2025 linked to the property downturn and broader economic concerns.

“We see China’s weaker growth as a mix of structural and cyclical factors,” Aubin says. “Overall, the era of consistent double-digit expansion is likely over.”

Younger consumers and middle-income households—key drivers of pre-pandemic growth—are showing increased caution, citing high unemployment and concerns about the impact of AI on future job prospects.

That said, European luxury brands remain relatively insulated from domestic competition for now.

“Chinese brands are making progress in premium and contemporary segments, but meaningful disruption to global luxury leaders is still years away,” Aubin notes. “A more immediate concern is the rise of dupes and counterfeits, which are increasingly viewed by some consumers as a savvy purchasing choice rather than a stigma.”

Rising gold prices in the recent quarters triggered a “wallet shift” that penalized European luxury brands in the Chinese market. Local consumers have increased their purchases of gold jewelry in the past 18 months, seeing those items as not only luxury goods, but also as savings or an investment in a more uncertain economic environment.

More recently, gold prices have begun to decline amid geopolitical developments, potentially reversing that trend.

“If gold prices continue to fall, traditional luxury categories such as ready-to-wear and handbags could benefit,” Aubin says.

Recent earnings across the sector highlight a “K-shaped” dynamic in the U.S. economy: high-income consumers continue to benefit from asset gains, while lower-income households face pressure from inflation and reduced purchasing power.

This divergence is increasingly reflected in luxury performance. Brands targeting the wealthiest consumers continue to deliver strong results, while those with greater exposure to aspirational buyers are under strain. 

“In the U.S., we expect higher oil prices to further weigh on spending in the coming quarters,” says Morgan Stanley Global Economist Arunima Sinha. “Low- and middle-income consumers are likely to bear the brunt of these effects and their spending on goods is likely to be impacted more than on services.”