Why the luxury goods stock run isn’t done yet

High-end luxury goods stocks are not cheap. That, perversely, is why you should buy them, as I will explain. Lately, and ironically, the stocks haven’t been luxurious at all. While global stocks rose , luxury goods stocks fell – about 10 per cent from April 24’s year-to-date high through May. That dichotomy has many fearing luxury’s market-leading rally since last October’s stock-market low is over. They worry that waning US and Chinese demand amid lofty industry valuations signal May’s slide starting a bigger plunge for these stocks. No. Luxury goods stocks’ run isn’t done. And its pricier individual stocks likely lead the way up from here as the global bull market rolls on – counterintuitive as that sounds. The recent weakness is a buying opportunity . These stocks, like big cap tech, have led the way up irregularly since last October’s bear market bottom and for many of the same reasons. They provide quality growth in a market that wants growth in a world where it is very hard to find and, hence, isn’t cheap. Global luxury goods are still up 14.2 per cent year to date – and 41.1 per cent from last year's October 12 bear market low, whumping global stocks’ 20.8 per cent return (in USD). Italy’s luxury goods stocks are up 28.8 per cent this year, Switzerland’s soared 25.5 per cent, while France’s rose 24.8 per cent – all despite last month’s weakness. Why? First, categories hit hardest in bear markets typically bounce highest early in the next bull market. It is an almost 100 per cent perfect market rule. And this time, that was dominated by Big Tech and luxury. During 2022’s market slide, world stocks fell 26.1 per cent in USD terms. What about global luxury goods? Down 38.2 per cent. The bigger drop fuelled more fear over their future, lowering expectations – and priming 2023’s rebound. Doubters still shriek “too much danger” – arguing May’s drop, compounded by still-high valuations, portend its hot streak fizzling fast – or that cheaper stocks (within luxury or elsewhere) are safer bets. Doubly wrong! Yes, the industry’s price/earnings ratio using projected 12-month earnings averages 24.2 – well above world stocks’ 16.3. But don’t fall prey to acrophobia. Low P/Es feel good as if somehow you can’t fall far with them (which you can if the earnings fall). But low P/Es don’t foretell outsized returns after bear market bottoms. Why? P/Es can mislead, particularly early in upturns – like now. As my April column detailed, stocks look forward while earnings look backward. Hence the “P” in P/E ratios climbs fast off the low as markets foresee a brighter future. But earnings forecasts – let alone actual earnings – lag later, amid post bear market dourness. This misleadingly inflates luxury goods’ P/Es now. Don’t believe it? Consider 2020’s growth-led global rebound. In the first six months after global stocks’ March 23, 2020 low in USD, the world market’s forward P/E nearly doubled to 20.8 from 12.8. Yet higher valuations didn’t kill that bull market. It had another 16 months left, with additional 38.3 per cent gains. At the industry level, global luxury goods’ forward P/E rose from a relatively high 17 at the 2020 bear market’s end to a nosebleed 37.9 in six months. Yet luxury goods stocks soared 59.7 per cent higher from there through to the January 4, 2022, bull market peak. Investors’ low-P/E fixation offers you another edge with luxury goods stocks – if you realise a crucial growth stock reality: during growth-led stretches, higher-P/E stocks routinely lead within high-growth categories. Folks seeking growth stocks don’t want lower quality, less certain growth. They want quality, and not the possibility of the highest growth, but the most likely growth! So, the highest-quality companies command growing valuations. When times are good for growth, the high-end stocks lead. It is the same reason lower quality small cap tech isn’t doing as well as big cap tech. And times are good for global luxury goods. Heated inflation didn’t dent their robust gross profit margins, which have remained above 55 per cent since 2021. Meanwhile, big French and Swiss companies racked up strong Chinese sales increases since the economy's reopening – despite stalling recovery fears. The broader Asia-Pacific region offers huge growth farther out as middle classes expand. It now tops the Americas in luxury goods industry revenue share at 40 per cent. Big global brands are now penetrating India as wealth there spreads broader, causing a luxury goods spending boom. Look around you in the Middle East and North Africa. The big global brands are expanding everywhere, particularly in the UAE. So don’t fear luxury goods stocks. Follow their leaders. Use this dip as an opportunity to buy them before their rally resumes. Think French, German, Italian and Swiss. Pay up for the highest quality stocks and watch the leaders lead in this young bull market. Ken Fisher is the founder, executive chairman and co-chief investment officer of Fisher Investments, a global investment adviser with $200 billion of assets under management