High-End Fashion Brands Face Wild Stock Swings Amid AI Market Fears

Major luxury companies including LVMH and Kering are experiencing dramatic stock price fluctuations as they work to recover from a two-year sales decline. The volatility is being amplified by hedge fund trading strategies and investor concerns about artificial intelligence market instability.

Major luxury fashion companies are experiencing dramatic stock market swings as they attempt to bounce back from a prolonged sales slump, with hedge fund activity and artificial intelligence market concerns adding fuel to the fire.

High-end brands including Dior and Gucci have seen sales of premium handbags and designer apparel decline following an initial post-COVID surge. Market watchers are now closely monitoring any indicators that suggest the luxury sector might be ready to return to positive growth.

The recovery signals remain inconsistent so far. Meanwhile, recent technology-driven market selloffs in the United States threaten to reduce wealthy consumers’ purchasing power, while hedge fund strategies targeting luxury companies are making stock price movements even more extreme.

LVMH, the globe’s largest luxury conglomerate with a market value of 260 billion euros ($308.49 billion), experienced its steepest single-day decline since 2020 in late January. This happened after company leader Bernard Arnault expressed reserved expectations for the coming year, crushing investor hopes for a rapid turnaround. In contrast, LVMH’s October market announcement had pushed shares up 12% in what was the company’s strongest trading day in over twenty years.

HEDGE FUNDS TARGET LUXURY SECTOR

Data from hedge fund tracker Hazeltree shows that luxury stocks and broader consumer spending categories faced some of the heaviest short-selling activity heading into earnings season.

When large numbers of short positions exist – meaning investors are betting stock prices will drop – it can create significant price volatility. Companies that report better-than-anticipated results often see short-sellers scramble to exit their positions quickly.

Kering stock surged 11% last week after the company’s final quarter revenues declined less severely than analysts predicted. New chief executive Luca de Meo described seeing “early, fragile” recovery indicators.

“Two factors are driving the volatility in luxury stocks like Kering,” said Michael Oliver Weinberg, a hedge fund investor and special advisor to the Tokyo University of Science Endowment.

“First, indexation has locked up capital in passive ‘buy and hold’ positions,” he explained, noting how significant portions of stock remain tied up in index funds, creating a smaller pool for active trading and causing larger price movements.

“Second, the market is now dominated by multi-manager hedge funds trading specifically against news and data points when they have a research or information edge.”

AI MARKET CONCERNS THREATEN LUXURY SPENDING

Hedge fund influence has contributed to increased volatility across European markets in recent years.

However, the luxury industry’s dependence on affluent consumer spending makes it particularly vulnerable to U.S. stock market fluctuations. After a remarkable bull market run, American markets are now experiencing increasingly unpredictable swings tied to artificial intelligence developments.

Kering’s de Meo has indicated that stock market performance serves as a gauge for American luxury consumption patterns and identified potential AI market corrections as a threat to European luxury companies.

“Many Americans have savings held in stocks, so if the market holds up well, consumption will keep driving growth. If there’s a crash, an AI bubble, etcetera, then we’ll talk again,” de Meo told reporters following last Tuesday’s earnings announcement.

“But for now it’s looking good.”

While hedge funds capitalize on changing market sentiment, investors with longer-term positions in luxury companies face a challenging ride.

“In these record high markets that are very concentrated with high valuations, clearly people are extremely nervous and everybody is wanting to hit the sell button,” said Christopher Rossbach, managing partner at J. Stern & Co in London, which maintains LVMH holdings.

“You have to look at the company fundamentals and look through the noise because there are significant cyclical issues that have hit luxury companies, but they are working through them,” he added.

Some market participants are shifting investments between different luxury brands, seeking to profit from recovery narratives. While troubled Kering jumped after reporting smaller-than-expected sales declines, Hermes – maker of coveted Birkin handbags and largely unaffected by the sector downturn – gained only 2.5% despite another strong quarterly performance. Hermes currently trades at 45 times projected earnings, more than double LVMH’s valuation.

“You’re seeing quite significant share price moves as the nuance is slightly different (at each company),” said Emily Cooledge, head of luxury research at Rothschild & Co Redburn. “And because we’re at that fragile tipping point moment.”