With post-pandemic euphoria waning, and currency headwinds looming, the high-flying luxury sector is coming back down to earth.

While increasing wealth and income polarization is supporting sustained luxury demand, “we anticipate moderating trends particularly amongst aspirational consumers who are more exposed to higher cost of living in Western markets,” observed Piral Dadhania, director of luxury goods and premium brands research at RBC Capital Markets.

What’s more, after witnessing consumers gorging on personal luxury goods in recent years, “we may see spend rotation back into experiential pursuits including travel, entertainment and dining, all of which have seen material price rises, lowering consumer purchasing power,” he added in an interview.

“After a very strong post-COVID-19 rebound, it’s likely time for growth to start to gradually normalize,” agreed Erwan Rambourg, global head of consumer and retail research at HSBC.

Rambourg said he expects luxury growth to be especially muted in the third quarter, and more robust in the fourth quarter “for mostly mechanical reasons.”

“Stores were mostly shut in mainland China the last six weeks of 2022 and the basis of comparison is getting easier in the U.S.,” he explained, noting that a strengthening euro could bring a “slight rebalancing between Americans’ purchases at home versus abroad.”

RBC tallies show luxury growth rates decelerating on a two-year stack: They were up 42 percent in first quarter, 35 percent in second quarter and estimated to come in at 28 percent in the third and 20 percent in the fourth.

“Even though absolute growth remains healthy, previous cycles in the decelerating growth phase are typically synonymous with more cautious investor sentiment (which we are incrementally seeing), potential multiple compression and negative earnings revisions,” Dadhania noted.

Analysts also expect luxury’s biggest players to continue to command the most attention, and gobble up more market share.

Challenges looming for all players include the online channel, now stalled; limited scope for price increases, with certain brands needing to “rebuild their access-price offering,” and menswear and sneakers, now taking a hit as they were “the biggest beneficiaries of easy, helicopter money in the U.S,” according to Rambourg, alluding to stimulus checks.

“We are back to ‘steady state,’ which means that fundamentals are becoming once again important as spend on luxury goods normalizes,” Bernstein analyst Luca Solca said in a recent report.

All eyes are on the U.S. and China, which have been the twin engines fueling rapid growth of personal luxury goods in recent years. Both nations face challenges.

According to Solca, the speed of America’s “normalization” and the speed of China’s economic recovery loom as the main influences on luxury’s prospects over the next six to 12 months.

Bernstein dialed down its U.S. growth forecast for fiscal 2023 to flat/low-single digits from mid-single digits, taking into account “very negative” indications from American department stores, and normalized spending after a two-and-a-half-year resurgence that made luxury goods a “momentum play” for investors.

“The crux of the luxury investment case is now whether we shall see ‘gentle’ growth normalization through a ‘soft landing,’ or whether we will see a dip and a spend ricochet after years of consumers splurging,” Solca argued. “The sector is no longer about chasing positive surprises.”

In his view, the luxury sector is returning to its cyclical ways, making “fundamentals” important once more.

“More and more, we will need to go back and analyze consumer confidence trends, global GDP growth prospects, gyrations in the stock market (for the USA) and the real estate market (for China) as valuable indicators of consumer willingness to spend money on discretionary products and services,” he explained.

That said, Solca cites currency headwinds (roughly 5 to 7 percent at the top line) as a “key factor” in the second half of 2023, “with hedging playing a key role in supporting profits.”

As for China, worrisome signs include anemic GDP growth, high youth unemployment, a propensity for saving among the middle class, and the real estate crisis, with Chinese property giant Evergrande recently filing for bankruptcy protection in the U.S.

But wth the Chinese government working to reignite growth and buttress consumer confidence, year-over-year growth should come in the 30 percent range in 2023, Solca predicts.

The rest of the world offers a mixed picture.

“There is evidence that some local clienteles such as Japanese and Continental Europeans, which had been very involved, are starting to land from a growth perspective,” Rambourg opined, characterizing American consumers as “somewhat muted still with a continued underperformance of access price points.”

American consulting firm Berlardi Wong, which analyzes e-commerce sales for its mostly premium direct-to-consumer clients, forecasts single-digit growth in online apparel sales for the fourth quarter, encouraged by a 10 percent gain in July, which it attributes partly to the impact of the “Barbie” movie, plus sellout stadium tours by Taylor Swift and Beyoncé — dress-up occasions in what it dubs the “experience economy.”

HSBC’s take on Chinese clientele? “Despite unfavorable macroeconomic circumstances, they are likely to continue to rebound after a very rough 2022, but this will now likely be more visible outside the mainland in Hong Kong, Macau, South Korea and Japan while a rebound in Europe is taking a bit longer to materialize,” Rambourg said.

He blames the latter delay on airline capacity, cost of travel and accommodation weighing on top of passport and visa issues for various tourist cohorts. “The return of Chinese group tours could be a positive catalyst but here again it will rely on better airline capacity and costs of travel coming down, which is not a given,” he added.

“From a regional perspective, we anticipate a continuation of current trends which includes moderating to declining demand in the U.S., healthy European and Japan momentum (with moderating locals offset by tourism) and continued recovery in Greater China regional trends,” RBC’s Dadhania concurred.

Expect no change in the dynamism that luxury’s biggest players have been enjoying.

“Sad to say but I think the bigger brands now are unstoppable and as long as we remain in a recruitment market, they should continue to dominate,” HSBC’s Rambourg said, explaining that these players — Louis Vuitton, Chanel, Hermès, Dior and Cartier — have scale advantages for media spending, real estate locations, better management and other business fundamentals.

“Some can, of course, enter the club,” he allowed. “Prada and Tiffany have a clear shot at generating more than 6 billion euros in the not too distant future and others, like Moncler, can remain successful despite being much smaller by dominating a niche. But if you are a new entrant in leather goods, watches or jewelry, there are always exceptions but good luck.”

Bernstein favors sector leader LVMH Moët Hennessy Louis Vuitton, which has been boosting its marketing spend to “sustain demand and moderating price increases to avoid post-YOLO [you only live once] hangover.”

By contrast, Bernstein has dialed down forecasts for Kering due to material management changes and “potentially distracting” M&A, cut its price-earnings targets for Prada in the wake of aggressive price increases, and raised them for Hermès International, which raced past all competitors and posted the strongest set of first-half numbers, even logging 21 percent organic growth in America.

Oliver Chen, managing director and senior equity research analyst covering retail and luxury goods at TD Cowen, holds a more positive view on Kering, confident in the Gucci turnaround as the Italian brand charts a new Fashion direction leveraging heritage and more timeless fashions.

“We believe Kering is pivoting and optimizing the brand portfolio with the same force and flexibility of a startup,” he wrote in a recent report, lauding the French group’s “modern approach to luxury.…[We] expect innovation of beauty, brand elevation and store experiences, particularly at Gucci and Bottega [Veneta].”

In an interview, Chen argued that the trend to “quiet luxury” should be a boon to the sector as a counterbalance to the logo trend, and entice consumers as they return increasingly to the office after an extended WFH period and consider tailored garments and more formal footwear.

On the economic front, the analyst expects slow to negative overall trends in the U.S. given weakness among aspirational consumers, high inventory levels, and worries over student-loan repayments. These challenges could be offset by some $800 billion in savings, low unemployment and wage growth outpacing inflation.

As for tactics within their control, Chen suggested that luxury brands leverage TikTok and other short-form video platforms to win further consumer attention, step up clienteling efforts and loyalty programs, improve inventory-management tech, and dial up their cultural relevance.

The analyst is also eyeing the burgeoning wellness trend, and how luxury players might address it.

“These themes around mental health and self care, they’ll be really important for the luxury customer, too,” he observed. “How does luxury think about health care and longevity?”

Nascent efforts include Dior’s recent collaboration with HydraFacial, and Gucci’s special-edition Oura ring, which analyzes sleep.

Cowen also pointed to viral interest in upscale California grocery chain Erewhon, famous for its organic products, nose-bleed prices and celebrity clientele.

“If you can afford to pay extra to be healthier, like that’s the ultimate luxury, right? I don’t think [luxury and wellness] are unrelated,” he surmised.