The global luxury goods industry is facing increasing pressure as China tightens its tax measures on the wealthy, coinciding with the emergence of signs of weak consumer spending in the United States, which threatens to deepen the crisis of a sector worth about 350 billion dollars, and which has been suffering from an ongoing slowdown for 3 years.
Markets are awaiting the results of major European groups in the coming days, amid fears that new Chinese taxes, the repercussions of the war on Iran, and a decline in American consumer confidence will delay the recovery that companies and investors were hoping to achieve during the second half of the year.
The new Chinese measures target wealthy people who used trust funds outside the country to protect their assets, as the authorities obligated them to disclose their tax obligations and pay accumulated taxes from previous years by October 22.
Analysts believe that the 20 percent tax may put pressure on the spending of the very wealthy segment, which remains more able to purchase luxury products compared to the middle class affected by the Chinese real estate crisis.
These developments are of particular importance. Because Chinese consumers represent about a fifth of global purchases of luxury goods, after having been the main driver of growth for major European brands for years.
Alexis Bonhomme, president of Trinity Asia, a luxury goods consultancy based in Shanghai, said that tax measures have begun to affect the spending decisions of high-net-worth individuals.
He explained that some wealthy people may face temporary liquidity pressures before the deadline for settling taxes, which prompts them to postpone high-value purchases. He added that this does not mean that they will stop buying luxury goods completely, but that the current consumer mood does not encourage spending.
These pressures come after years of decline in Chinese demand since the “Covid-19” pandemic, as a result of the slowdown in the economy and the decline in confidence associated with the continuing real estate sector crisis.
Data from shopping malls on the Chinese mainland during the summer showed a sharp slowdown in sales growth, according to a note by Bernstein analysts.
Reuters quoted two sources familiar with the performance of shopping centers during the third quarter as saying that market conditions remained generally weak, with a large discrepancy between brands. Brands that focus on quiet luxury, such as Brunello Cucinelli, which specializes in cashmere, and Loro Piana, affiliated with the LVMH group, achieved better performance than brands that are more prominent in displaying their logos, such as Louis Vuitton and Gucci.
This shift reflects a change in the preferences of some wealthy buyers, who have begun to prefer less eye-catching products, rather than traditional manifestations of luxury.
The weak demand was reflected in the performance of shares of major companies, as the shares of “LVMH” and “Hermes”, which manufactures “Birkin” bags, lost about 40 percent of their value since the beginning of the year, trading near their lowest levels in years.
The shares of the Kering Group, which owns the Gucci brand, also fell by 29 percent, amid mounting concerns about its ability to restore growth.
Gucci faces special challenges, after Kering warned analysts of the expectation of a further contraction in the brand’s sales, which prompted a number of financial institutions to reduce their target prices for the group’s shares. These developments indicate that the pressures are no longer limited to weak sales in China, but rather have extended to the valuations of European companies and their future profit expectations.
The situation is becoming more difficult with the emergence of signs of slowing demand in the United States, the largest market for luxury goods in the world, which until recently constituted one of the most prominent sources of support for the sector.
Gains in US stocks, especially technology companies, have boosted consumer wealth and supported purchases of luxury products.
But data on credit card spending, tracked by Citi, showed purchases of luxury goods declined for the third month in a row during August. This coincided with polls indicating growing concern about the prospects for the US economy before the midterm elections, which threatens to weaken discretionary spending even among the highest-income consumers.
The repercussions of the war on Iran increase the state of uncertainty, in light of its impact on energy prices and the global economy, which makes restoring demand more difficult for companies that depend on the confidence of wealthy consumers.
Amidst these pressures, fine jewelry has emerged as one of the few industries that has maintained relatively better performance. Brands such as Cartier, a subsidiary of the Richemont Group, have benefited from the increasing interest of wealthy consumers in gold and precious metals, which are seen as products that retain their value better in the long term.
This trend indicates a shift in buyer behavior from spending on products associated with fashion and brand logos to acquiring pieces that combine personal use with ongoing material value.
In Beijing, Deng Zhi, 51, who works in exporting ceramic building components, said he expects to reduce his spending on luxury goods by 20 percent compared to previous years. He explained that the tax measures do not necessarily mean that the wealthy people subject to them will stop buying luxury products, because the amounts they spend on these purchases are not large compared to their wealth.
But he considered that the most important problem is the broader impact of these measures on confidence, as those with relatively lower incomes and wealth may fear that similar measures will be extended to them in the future.
Investors will get their first major indicator of the sector's performance when LVMH announces its business results next Monday. Analysts expect the group to record quarterly sales of 18.5 billion euros ($20.7 billion), an increase of one percent compared to the same period last year.
Kering and Hermes are scheduled to announce their results on October 22, coinciding with the deadline set in China for settling tax liabilities owed on assets held through offshore funds.
Markets will focus on sales performance in China and the United States, along with indicators of improving demand among wealthy customers and the ability of companies to maintain their profit margins.
The luxury industry thus faces a double test. The first is to restore Chinese consumer confidence amid tightening tax controls and a slowdown in the economy, while the second relates to its ability to overcome weak American spending.
As brands continue to diverge, companies may re-evaluate pricing, expansion and marketing strategies, and focus more on products that combine quality and long-term value. But the upcoming quarterly results will determine whether the current pressures represent a temporary phase of decline, or the beginning of a longer period of weak growth in an industry that has become accustomed to relying on the strong spending of the wealthy in the world’s two largest economies.
The bull market for US stocks continues its strong march as it approaches its fourth anniversary, driven by the engine of spending on artificial intelligence, which boosts corporate profits and economic growth.
The Standard & Poor's 500 index is trading near record levels, ahead of October 12, which marks four years since the benchmark index closed at its lowest level in the current session, indicating the beginning of the latest rise in the market, according to Reuters.
The very strong growth in corporate profits, supported by spending on expanding artificial intelligence and solid economic conditions, contributed to driving the final phase of the market’s rise, and is a major reason for investors’ optimism about the coming quarters.
But risks still loom on the horizon even though the index continues to rise, as the Federal Reserve’s raising of interest rates and the sharp rise in US Treasury bond yields are two factors that may limit the momentum of stocks. Markets may also witness fluctuations as the US midterm elections scheduled for next month approach. The market's reliance on artificial intelligence is also a source of concern, as markets may meet any indications of a weakening of this trend with harsh penalties.
“AI is the defining characteristic of this bull market,” said Anthony Saglimbini, chief market strategist at Ameriprise. “I think what we are seeing four years into the bull market is that the easy gains associated with artificial intelligence have been achieved... As this bull market progresses, companies, especially technology companies, will be under increasing pressure to prove that the spending they are making today will actually translate into profits.”
In terms of the lifespan of bull markets, the current wave can be classified as mid-life. The recent rise in the Standard & Poor's 500 index is the eighth longest in terms of duration among emerging markets since World War II, according to Ryan Detrick, chief market strategist at the Carson Group.
Although stock experts differ on the definition of a bull market, the common definition is that the market has risen by at least 20 percent, after declining by at least 20 percent from a previous peak.
The current bullish wave achieved gains amounting to 117 percent, making it the sixth best performing bull market since World War II.
“Four years is by no means a reason to worry about a bull market,” said Mark Hackett, chief market strategist at Nationwide. “Bull markets don’t end just because they get old, they end because they get sick.”
Artificial intelligence dominated the latest wave of growth in the market, as the launch of “GBT Chat” came about a month after its beginning. American companies are recording tremendous growth in profits, with the profits of Standard & Poor's 500 companies expected to rise by more than 35 percent this year, driven by capital spending by giant technology companies, known as "hyperscalers," to build data centers.
Oxford Economics estimates that about a third of the recently recorded US economic growth is due to artificial intelligence, including the net impact of direct investments supporting the expansion of artificial intelligence infrastructure, as well as the contribution of rising investor wealth as a result of stock market gains in enhancing consumer spending.
“We are seeing the impact of artificial intelligence on the economy and corporate profits,” Saglimbini said.
Among the eleven sectors included in the Standard & Poor's 500 index, only the technology and communications services sectors, which include the giant companies in the field of artificial intelligence, achieved gains greater than those of the index itself during the rising wave.
The market value of Nvidia, whose chips dedicated to artificial intelligence made it a prominent symbol of this technological era, jumped to $5.8 trillion, compared to $286 billion on October 12, 2022. The company has become the largest in the world in terms of market value. The United States includes 13 companies with a market value each of at least a trillion dollars, and all but two of them belong to the technology sector or have significant exposure to artificial intelligence.
Gains in giant technology and artificial intelligence stocks give these stocks greater influence over major stock indices, but they also make the market more concentrated in a limited number of companies. The share of the ten largest companies in the Standard & Poor's 500 index rose to about 40 percent, compared to about 28 percent in October 2022, according to J.P. Morgan Asset Management.
“This reflects strong economic fundamentals and superior earnings growth, but it also involves some risks,” said Angelo Corkavas, chief global investment strategist at Edward Jones. Concentration risk lies in the fact that if the prevailing trend loses its attractiveness, investment portfolios may be affected to a greater extent than usual.”
Another risk is represented by the Federal Reserve’s recent shift towards raising interest rates, as part of the US central bank’s efforts to reduce high inflation. Tighter monetary policy could slow the economy, perhaps sharply. Indeed, the recent bear market, which took the market to its lowest levels in October 2022, coincided with a sharp cycle of interest rate hikes.
Interest increases also contribute to the significant rise in Treasury yields. The yield on benchmark ten-year bonds was hovering around 5.2 percent, after recently reaching its highest level in 24 years.
High yields pose a disadvantage to stocks, including by making bonds more attractive as a competitive investment to stocks.
Korkavas said that Edward Jones still favors increasing the relative weight of stocks in investment portfolios, but its recommendation has become less impulsive than it was previously, pointing to the increasing attractiveness of fixed income tools.
He added: “We still believe that the bull market is not about to end... but we believe that it makes sense to reduce some of the risks in investment portfolios.”
US stock index futures rose slightly on Friday, with oil prices falling due to easing concerns about supplies in the Middle East, while telecom stocks remained under pressure after the SpaceX acquisition of bandwidth raised concerns about competition in the sector.
Oil prices fell after US President Donald Trump said that his country would not attack Iran before the US midterm elections scheduled for next month, which eased fears that the conflict would lead to further disruptions in global energy supplies, according to Reuters.
Brent crude futures fell by 1.2 percent, but remained above $100 per barrel, which is considered an important psychological threshold in the markets.
In the bond market, US Treasury bond yields were characterized by relative stability, as the yield on standard 10-year bonds settled at 5.25 percent, remaining close to its highest level in 24 years, amounting to 5.364 percent, recorded on Wednesday.
The Standard & Poor's 500 and Nasdaq indices, which are dominated by technology company stocks, headed towards achieving weekly gains, despite their decline during the previous two sessions, supported by optimism surrounding the season of announcing third-quarter results, especially in light of the momentum led by the artificial intelligence sector, which pushed the two indices to record levels earlier in the week.
The Dow Jones index of major companies was also heading towards achieving slight weekly gains.
Shares of major growth companies recorded general increases in pre-market trading. “Nvidia” shares rose by 1.6 percent, while “Tesla” and “Amazon” shares rose by about 1 percent each.
SpaceX shares rose by 3.7 percent, after the company specialized in manufacturing rockets and satellites concluded a deal to acquire a portfolio of low-bandwidth spectrum bands covering all parts of the United States, in a move that represents a direct challenge, through space, to the major traditional wireless communications companies in the country.
On the other hand, the shares of telecommunications companies came under severe pressure. T-Mobile US and AT&T shares fell more than 6 percent each, while Verizon shares fell by 5.3 percent.
By 5:54 a.m. EST, Dow Jones mini-futures rose 86 points, or 0.17 percent, and Standard & Poor's 500 mini-futures rose 31.5 points, or 0.4 percent. Nasdaq 100 futures rose by 251 points, or 0.81 percent.
The season for announcing companies' quarterly results is scheduled to accelerate next week, with major banks preparing to reveal their results. Expectations of strong profits have contributed to supporting US stocks during the recent period, despite geopolitical fluctuations and concerns about rising interest rates.
Among the stocks that recorded early gains, Humana's stock rose by 14.5 percent, after US government data showed that 95 percent of the company's members participating in Medicare Advantage health insurance plans for the year 2027 are registered in plans with a rating of 4 stars or more.
On the other hand, Apple shares fell by 1.8 percent, following media reports that the iPhone manufacturer had asked some of its suppliers to reduce production of components for the iPhone 18 Pro and iPhone 18 Pro Max, in light of the rising costs of memory chips and increased prices, which led to a decline in consumer demand.
