European luxury shares have recorded a marked pullback this year, with the group down an average 16% year-to-date compared with a 1% decline for the MSCI Europe index, according to an RBC Capital Markets note dated Monday. The brokerage linked the underperformance in part to investor concern about the Iran conflict and its potential hit to Middle East demand.
RBC identified Herm s, Moncler, Watches of Switzerland and EssilorLuxottica as among the most oversold names in the pool, while adidas, Nike, Kering and Burberry were flagged as carrying the largest downside risk should the conflict broaden or deepen.
The firm applied three stress scenarios to a 15-stock sample to quantify potential earnings sensitivity. In the bear case, RBC assumed a 30% reduction in Middle East revenue sustained through 2026, which translated to an average earnings-per-share (EPS) decline of 6% across the group.
Under a more severe 'super bear' scenario - a 50% regional revenue reduction combined with a 1% revenue reduction across the rest of the world - the sample produced an average EPS decline of 15%.
According to RBC, all of the stocks examined appeared oversold versus the bear-case outcomes. The mismatch between price moves and earnings vulnerability was most pronounced at Watches of Switzerland, a name with zero reported Middle East exposure, and at Herm s, where the bear-case EPS impact was modest at minus 2% for fiscal 2026.
"Hermes shares have sold off by 9% since the start of Iran conflict which relative to our -2% EPS bear and -4% EPS super bear scenarios (which are well below peers) for FY26E appears to be overdone if strictly looking at earnings," RBC said.
Moncler was another example cited by the note. With three stores in the UAE accounting for roughly 2% of group revenues, Moncler faced a super-bear EPS hit of only minus 4%. Its shares had fallen about 10% since Feb. 27.
By contrast, the Swatch Group emerged with the largest Middle East revenue share in the sample, at 10% of fiscal 2025 sales. That exposure, combined with Swatch s depressed earnings base, produced a super-bear EPS impact of minus 58% for fiscal 2026 in RBC s scenario work.
Kering recorded the steepest super-bear EPS hit among the core luxury houses at minus 15%, a reflection of margin compression during what RBC described as a Gucci reset. LVMH, where Middle East revenues represented 6% of sales in RBC's breakdown, had its price target lowered to 600 from 625.
At the group level, RBC trimmed fiscal 2026 revenue expectations by 2% to 80.3 billion and cut EPS by 3% to 22.38, leaving RBC's estimates roughly 4-5% below consensus.
Despite downward revisions, RBC said the observable impact of the Iran conflict remained largely geographically contained. In the brokerage s words:
"From our observations and discussions with covered companies, the impact from the Iran war is fairly contained to the Middle East region, with no observable change to consumer behaviour or demand trends in other key regions including North America, Western Europe and Asia Pacific (China, Japan and South East Asia) so far," the note said.
RBC highlighted upcoming first-quarter reporting dates as initial tests of those assumptions, noting LVMH's results on April 13, Moncler's on April 14 and adidas's on April 29 as the first scheduled gauges for whether the regional impact is widening.
Summary
RBC's analysis shows uneven exposure to Middle East revenue shocks across luxury groups. Some names, including Herm s and Watches of Switzerland, look severely oversold relative to potential EPS damage, while others such as Swatch and Kering face more acute earnings vulnerability under deep regional demand contractions. The brokerage has trimmed group revenue and EPS forecasts and adjusted a major price target in light of the scenarios tested.
Key points
- European luxury stocks are down an average 16% YTD versus MSCI Europe down 1%.
- RBC ran three stress scenarios across 15 stocks, with bear and super-bear cases producing average EPS hits of 6% and 15% respectively.
- Exposure varies widely: Watches of Switzerland and Herm s show limited EPS sensitivity, while Swatch and Kering display larger downside under severe scenarios.
Risks and uncertainties
- Escalation of the Iran conflict could deepen Middle East demand declines, amplifying EPS pressure for more exposed luxury groups.
- Investor repricing may remain disconnected from the measured earnings sensitivity RBC models indicate, creating further volatility in luxury equities.
- Upcoming quarterly results for major luxury names will test whether signs of containment outside the Middle East persist.