Europe's Luxury and Auto Industries Underperform Amid Slowing Demand

European Consumer Discretionary Sector Disappoints Investors

The European consumer discretionary sector has disappointed investors this earnings season, with earnings per share for the MSCI Europe consumer discretionary index dropping more than 12% in the first quarter. This decline is particularly notable, given that companies representing more than 80% of the benchmark's market capitalization have reported. In contrast, the broader MSCI Europe index showed stronger-than-expected growth of 5.7% for the same period.

The sector is facing significant headwinds, with automakers and luxury goods companies struggling to regain momentum. LVMH SE and Kering SA have both warned of weaker demand, citing the impact of the war in the Middle East on the key shopping hub of Dubai and global consumer confidence. Even Hermes International SCA, a traditionally resilient luxury name, saw a dip in sales, sending shares tumbling.

Hotels are also feeling the pinch, with Accor SA - the most exposed global hotel operator to the Iran war - citing a strong start to the year in the Middle East region that was derailed by the outbreak of conflict. Its hotels in the United Arab Emirates, which account for about 3% of rooms, were particularly affected.

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The luxury automakers are also struggling, with the fallout from the war compounding existing challenges including fierce competition from Chinese manufacturers and ongoing effects of tariffs. Stellantis NV saw the sustainability of its US turnaround questioned by investors, while Ferrari NV's higher profit was offset by a drop in first-quarter deliveries as wealthy Middle East customers held back purchases.

President Donald Trump's plan to implement 25% tariffs on cars and trucks from the European Union if the bloc doesn't swiftly ratify a long-delayed trade deal only adds to the uncertainty.

However, there are some bright spots. Mercedes-Benz Group AG expects a stronger second half of the year on the back of new models and strong orders, while BMW AG expects profitability to remain stable. Porsche SE managed to deliver solid profit after its major shift away from electric vehicles.

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Additionally, Stellantis' plans to sell European plants to Chinese manufacturers and its potential re-entry into the Chinese market are seen as positive, according to Citigroup analyst Harald C Hendrikse. "Whilst none of these are 'magical' wands, they do provide some improved roadmap" for the company's future, he said.

Moncler SpA surpassed expectations thanks to strong demand from Asia, while Adidas AG benefited from momentum in athleisure, retro football jerseys and football gear - pointing to pockets of resilience within consumer behavior.

Despite these pockets of resilience, the outlook remains cautious, with uncertainty about how long the conflict will last and oil prices still edging higher. Estimate upgrades have been limited to the energy, semiconductors and materials sectors in Europe this season, Barclays analyst Magesh Kumar said, with broad cuts across consumer sectors.

"With no clear sign of an imminent inflection, risks remain skewed to the downside" for Europe's luxury labels, carmakers and hotels, Bloomberg Intelligence strategists Laurent Douillet and Simbarashe Gumbo said.