The benchmark CAC 40 Index is up 14% this year, outpacing other major markets and putting it on the cusp of eclipsing the record closing high set in January 2022. The trio of luxury companies, plus cosmetics maker L’Oreal SA, account for more than a third of the gain. Investors are betting their sales and earnings will hold up now that a key market, China, is open for business again.

For now, the rally is confounding skeptics who expected surging inflation, rising interest rates, China’s pandemic lockdowns and the specter of a possible recession would finally bring stock prices back to earth. Luxury stocks are showing the kind of momentum that large technology companies did in the 2021 bull market. 

“Luxury stocks have been an investor favorite for a while now but the fact that the big tech stocks don’t have much wind in their sails at the moment is putting the spotlight on them, especially with the Chinese economy reopening,” said Roland Kaloyan, head of European equity strategy at Societe Generale SA. 

The CAC’s gain this year is on par with that of the Nasdaq 100 Index, the high-octane technology-stock benchmark in the US. Yet even as rising interest rates and slowing sales have weighed on the outlook for tech, luxury has powered ahead. Demand has held up for clothing, handbags, Champagne, watches and perfume, with producers finding no difficulty in raising prices and beating inflation.

Forced to stay home because of the government’s Covid zero policy, Chinese consumers saved one-third of their income last year, depositing 17.8 trillion yuan ($2.6 trillion) into banks which investors hope will be partially converted into leather handbags worth thousands of dollars. 

“Luxury goods demand has been little affected by the pressure of rising inflation in contrast to mass-market consumption, as the most affluent households have benefited in recent years from rising wealth and also from a huge stock of excess cash savings accumulated over the Covid lockdown periods,” said Edmund Shing, global chief investment officer at BNP Paribas Wealth Management.

Beyond luxury stocks, industrial companies Schneider Electric SE — another China beneficiary — and Air Liquide SA have been big contributors to the surge, as has Vinci SA, a construction company and operator of toll roads. Financial stocks also account for almost 10% of the CAC’s weighting, and its three banks have risen 19% or more, led by BNP Paribas SA. 

France’s banking sector is increasingly attractive given its low valuations and rising interest rates, said Kevin Thozet, a member of the investment committee at Carmignac Gestion in Paris.

Even after this year’s gains, the CAC is priced at less than 13 times estimated earnings, below its 10-year average of 14, encouraging fund managers that the gains for the broad market have further to go.

While the broader French market still looks relatively cheap, concerns are creeping in that luxury in particular is too expensive. Societe Generale’s Kaloyan recently cut the sector to neutral after its relative valuation multiples rose back to their historic highs. 

Investors value LVMH and Hermes above their average 10-year earnings multiple, while Kering is in line with the average. Analysts also see relatively little upside for the group —- their aggregate price targets imply a 4.4% gain for LVMH’s stock over the next year, a 5.7% increase for Kering and a 9.6% drop for Hermes. 

Still, earnings reports over the past few weeks have showed that even though investors had sky-high expectations for these stocks, they were willing to look past any slight snags and focus on evidence that sales in China are recovering from the pandemic lockdowns. 

LVMH, for example, last month reported second-half operating profit margins that were lower than analysts expected, yet the stock erased its losses on the day to finish unchanged. It closed at a record high on Feb. 3.

Shares of Kering on Wednesday finished the day up 3%, reversing an initial 4.8% drop. Investors were quick to look beyond worse—than-expected fourth-quarter sales and issues with the Gucci and Balenciaga brands to double down on the outlook for a recovery in China as the nation’s economy reopens. And on Friday, Hermes dropped as much as 2.1% after its earnings, only to erase the decline in late trading.

The resilience and size of the luxury industry — LVMH, with a market value of $439 billion, is Europe’s largest company — means France punches above its weight in terms of global markets. While it’s the world’s seventh-biggest economy as measured by gross domestic product, it’s the fifth-biggest stock market and the largest in Europe, a crown it took from the UK last year.