“The U.S. and European customer is feeling greater pressure from inflation, particularly among the aspirational customer base with sales to top luxury customers driving the bulk of growth,” wrote TD Cowen analyst Oliver Chen in a note following LVMH’s earnings last week.

While luxury companies pride themselves on catering to the top 1%, the pullback by the 10% has had broad repercussions. Over the past year, the Tema Luxury ETF has underperformed the broader market, shedding 3% as the S&P 500 has gained 23%.

Less wealthy shoppers account for about $273.5 billion in fashion spending annually across the seven most important markets for luxury goods, according to a recent McKinsey study. Luxury brands, in turn, generated half of their revenue across those seven countries from those customers in 2023, the McKinsey analysis found.

“The entire group needs to have the aspirational consumer come back to have a meaningful step up in sales and earnings again,” said Eric Clark, portfolio manager and a member of the investment committee at Accuvest Global Advisors.

But who, exactly, is the aspirational consumer? McKinsey defined the group as people who buy at least one luxury item a year, and spent between €3,000, or roughly $3,200, to €10,000 on fashion annually.

Those shoppers may have needed to save up for the splurge, or scrimped on something else to pay for their luxury purchase. They are much more exposed to macroeconomic strains than the superrich.

“With inflation high, this buyer is being very stingy with where she spends,” said Clark, who is also a subadvisor to a consumer-oriented strategy at Rational Funds. Brands that don’t offer a compelling, differentiated value proposition are going to struggle getting that shopper to open her purse, he added.

That is especially true now that consumers are spending more on services than they are on goods, reversing pandemic-era consumption patterns fueled by stay-at-home orders and government stimulus payments. In the first quarter of 2024, service spending rose 4% from the previous quarter, while outlays for durable goods fell 1.2%, according to preliminary gross domestic product estimates released by the Bureau of Economic Analysis Thursday.

In the long run, merely wealthy shoppers will come back to stores, analysts say. But until they do, investors looking to buy into the luxury space may want to park their money in companies that rely less on the cohort.

“As with any other downturn, the best place to be is in those companies that have the greatest exposure to ultrahigh net worth individuals—economic recessions don’t affect them,” said Javier Lastra, portfolio manager for the Tema Luxury ETF.

He pointed to companies like Prada, Brunello Cucinelli, and Hermès International, which all recently reported increases in quarterly revenue despite the tougher environment for luxury overall.

LVMH also remains a solid bet, Clark and Lastra say, even if sales growth has hit a bit of a lull. In its latest quarter, revenue fell 2% year over year. Chen, the TD Cowen analyst, reiterated a Buy rating on the stock following the company’s earnings, arguing that the company’s “solid underlying fundamentals” and consistent growth in revenue could bring higher earnings per share. Plus, with a price/earnings ratio of 24 times, the stock trades at a slight discount to its five-year average of 26.3, according to FactSet.

Of course, a company’s consumer base isn’t everything. Coach’s parent Tapestry, which chiefly caters to aspirational shoppers, had a strong holiday quarter and raised its earnings outlook for 2024. The stock has slightly outperformed the market this year, weighed down chiefly by uncertainty over whether its proposed merger with competitor Capri Holdings will pan out.

Meanwhile, the shares of high-end brands such as Burberry, Salvatore Ferragamo, and Kering, are tanking as the companies wade through multiyear turnaround plans that have yet to take off. “Turnarounds are really difficult in good times,” Lastra said. “In difficult times, they’re almost impossible.”

Write to Sabrina Escobar at sabrina.escobar@barrons.com