The plummet in Brunello Cucinelli SpA’s stock following its solid second-quarter earnings report signals a challenging season for European luxury goods companies. Even though earnings met expectations, the lack of a guidance upgrade caused shares of the Italian cashmere house to drop by 2.3%. This suggests that investors are wary about the demand for high-end products in the luxury sector.

Stifel analyst Rogerio Fujimori highlighted the disparity between top-tier luxury brands like Hermès and those undergoing turnarounds, such as Burberry. Despite Cucinelli’s strong sales performance, full-year estimates are unlikely to shift, leading to a tepid response from investors. This cautious outlook is mirrored in analyst forecasts, with profit estimates dropping for the luxury sector at a faster rate than the broader European market.

Cucinelli has enjoyed stability due to its appeal to the ultra-wealthy, resulting in a 4.4% increase in its stock this year. However, competitors like LVMH have faced declines, with the MSCI Europe Textiles Apparel & Luxury Goods Index dropping by 13% from earlier highs.

Morningstar analyst Jelena Sokolova noted that while Cucinelli benefitted from the “quiet luxury” trend, a slowdown in their performance indicates a subdued demand outlook for other luxury brands. Compounding this is a pullback in Chinese demand post-pandemic, forcing companies like Kering, LVMH, and Burberry to slash prices to clear unsold inventory.

As Burberry and Richemont prepare to report their results, analysts forecast a lackluster second-quarter. They predict that the first-half profits will be impacted by China’s economic slowdown, particularly affecting mid-range brands such as Swatch.

JP Morgan’s Chiara Battistini indicated that the luxury sector’s recent devaluation has made stocks more attractive. However, with muted first-half results expected and ongoing earnings revisions, a positive shift in investor sentiment is unlikely in the short term.