The State of Fashion 2026: Turbulence is the new normal

The annual State of Fashion report by global management consulting firm McKinsey & Company and BoF Insights, The Business of Fashion’s data and advisory team, has revealed that 46 percent of fashion executives expect industry conditions to worsen in 2026, an increase from 39 percent in last year’s report.

The report, which reveals how changes in trade, technology and consumer behaviour will challenge businesses in 2026, states that with trade tariffs, geopolitical instability and falling consumer confidence is causing widespread concern, fashion leaders are preparing for “turbulence as the new normal”.

Tariffs ranked among fashion leaders' top risks heading into 2026

Major changes to US tariffs in 2025 emerged as a “defining force” in reshaping the global trade landscape, and ongoing tariff impacts remain a “major factor” in the year ahead, with the report adding that the apparel and footwear industry is among the most exposed to tariff impacts.

76 percent of fashion executives said responses to trade disruptions and rising tariffs will be the biggest theme shaping the industry in 2026, and 40 percent cited disrupted trade flows as one of their top risk factors.

Additionally, around one-third of executives say industry conditions in North America are now “unpromising or very unpromising”. Next year, 71 percent of executives expect to increase prices compared to 52 percent last year. This is even more pronounced in North America, where executives expect to hike prices the most; 45 percent plan to raise prices by more than 5 percent in the year ahead.

To combat the tariff turbulence, the report reveals that brands are making price changes, shifting sourcing and improving efficiency with larger suppliers pursuing footprint optimisation, digitisation and automation, while smaller players face mounting pressure. Agility will be the defining factor enabling brands and suppliers to maintain their competitive edge.

Expect more competition in 2026 as the market remains flat

The report also adds that “competition will heat up in a flat market” as all markets are expected to remain relatively flat, growing in the low single digits. In the fashion segment, growth across all markets is expected to “remain muted” with Europe expected to grow by 1 to 2 percent, while the US and China will increase by 1 to 3 percent.

Luxury is expected to post slightly higher growth rates than fashion across key markets “as a spate of debuts from new creative directors in late 2025 provides a much-needed reset following the segment’s well-documented slump”.

While brands from across price segments are “feeling the pressure of increased competition for share of wallet amid reduced consumer sentiment and many have been moving upmarket in a bid to differentiate”. The report notes that customers will remain value-conscious in 2026, with 31 percent adding that they are willing to splurge on fashion if it is the right product, which offers potential for more elevated propositions.

AI is named as the biggest opportunity for the industry

When it comes to positives for 2026, executives cite artificial intelligence as the “biggest opportunity,” surpassing other business priorities such as product differentiation and strengthening sustainability credentials. The report notes that leading brands will scale their AI investments beyond one-off experiments, fully integrating it across functions and into their business models “to stay ahead of the curve”.

The report also adds that AI investments will be critical to rewiring the workforce and staying competitive in acquiring and keeping talent, as 47 percent of US consumer goods and retail employees say training is the most important factor for gen AI adoption.

For consumers, AI is impacting shopping “at unparalleled speed,” as they turn to AI chatbots like ChatGPT and Gemini to help them choose what to buy and where to buy it. This means generative engine optimisation (GEO), where online content is optimised to be easily read by AI, is set to become an essential add-on to SEO so that brands can remain visible and differentiated from competitors. While traditional search still dominates, AI-discovery is accelerating with 41 percent of consumers stating they “trust generative AI search results more than traditional advertising,” and 85 percent “are more satisfied with AI-assisted shopping than conventional online methods”.

Jewellery momentum to continue and smart eyewear to emerge as a key category in 2026

Shining bright in the report is the jewellery sector, which it identifies as a key trend for 2026, continuing its momentum from this year, where its sales outpaced all other fashion categories. The report states it will reap the rewards of a growing customer base “seeking long-lasting investment pieces and opportunities for self-expression”.

Over the next few years, jewellery is forecast to be the fastest-growing category in fashion by unit sales, growing at nearly four times the rate of clothing. Both costume and fine jewellery are expected to grow similarly, with sales growing between 5.3 and 5.6 percent per year through 2028.

This growth is particularly pronounced in branded jewellery, which made up 25 percent of the market in 2024 and grew 8.3 percent per year between 2021 and 2024, almost double unbranded jewellery’s 4.3 percent growth. In 2025, 61 percent of consumers say jewellery is a category in which brand matters most, increasing to 82 percent in China.

Diamond jewellery accounts for roughly one-third of global jewellery sales and is expected to expand at 4 to 5 percent per year through 2028. There will also be an increase in lab-grown diamonds, with growth expected to rise 15 to 16 percent annually as adoption increases, particularly in India, China and the US.

Smart glasses have also been highlighted as the fastest-growing accessory category through to 2028, as wearable tech continues to demonstrate strong market momentum, with the segment set to grow 9 percent annually to 2028. Smart glasses are tipped as a leading product with analysts expecting sales to quadruple in 2026, as more fashion brands have product launches scheduled in the year ahead, which the report notes will offer the potential to unlock new customer bases. They will be looking to capitalise on the success of Ray-Ban Meta glasses, which were the top-selling product in 60 percent of Ray-Ban’s EMEA stores as of Q3 2024.

Other wearables, including smart watches, rings, eyewear and bands, will continue to grow. Currently, consumer adoption of smart watches is high, with the category representing 35 to 40 percent of watch market volume, while smart eyewear and smart rings represent less than 10 percent of their respective market volume.

The State of Fashion 2026 report: key themes include wellbeing and resale

Other themes highlighted in The State of Fashion 2026 report included wellbeing becoming “central to how consumers live,” with 84 percent of US consumers saying wellness is a top or important priority in their day-to-day lives in 2024, rising to 94 percent in China, while secondhand fashion will continue to rise in popularity, with the report adding that brands must define their own resale strategies to boost perception and enrich their business models. Research reveals that the secondhand fashion and luxury market is set to grow two to three times faster than the first-hand market through to 2027.

Unlocking efficiency and elevating product quality is key to driving growth in 2026

The report also states that in a challenging fashion market, companies must “become more efficient to drive growth”. Old advantages like scale and low-cost sourcing are no longer sufficient to sustain a healthy economic model. By taking advantage of new technology, businesses can improve productivity to reduce costs, unlocking resources to invest in differentiators that enable growth.

Fashion executives say changing margin, cost and cash strategies will be the second most-significant theme to shape the industry in 2026, second only to tariffs and trade disruptions. 45 percent identify sourcing costs as the area of their economic model under the most pressure, followed by pricing and inventory management.

With margins under pressure and competition intensifying in 2026, elevation strategies, such as brands moving upmarket and improving product quality and offering better in-store experiences, will “gain new urgency” to capture the former high-end shopper squeezed out by luxury prices. This is being driven by 51 percent of global customers saying quality is a key driver in creating a high-end brand perception, the highest of all attributes, while 47 percent cite a strong brand story.

While consumers are becoming more price-conscious, around one-third are still willing to splurge on fashion when they find a good reason, such as when products are well-crafted and when consumers are made to feel special and valued.

Luxury needs a recalibration

As the fashion industry is currently in a luxury slowdown, the report states it has prompted a phase of strategic renewal, with luxury brands prioritising creativity and craftsmanship over price-led growth to recapture desirability and rebuild client trust, as the top reported attribute that ultra-high-net-worth customers say epitomises luxury is “expertise and quality”. While Gen Z and Millennial customers cite exclusivity as a driver for increased luxury spend, 11 percentage points above the average.

This luxury reset comes as nine of the largest 15 luxury brands appointed new creative directors in the 12 months since September 2024, while four also appointed a new chief executive. The spring/summer 2026 season was seen as an early test of brands’ new creative directions, with designers at houses from Chanel and Dior to Balenciaga and Loewe showing their debut womenswear collections.