The ongoing economic recovery in China, albeit sluggish, may not exert significant influence on the S&P 500, as investors remain cautious. This revelation emerged on Monday, underlining the fact that Chinese operations contribute to a mere 5% of the total revenue generated by companies listed in the S&P 500, as reported by Scott Chronert from Citi.
Chronert went on to emphasize that a complete loss of revenue from China would result in approximately a 7% decrease in the earnings of the S&P 500—an outcome deemed substantial but not catastrophic. A 5% reduction in revenue stemming from China would lead to a marginal 0.3% decline in earnings-per-share (EPS) for the index. Should half of all revenue from China be eliminated, the S&P 500’s EPS would experience an approximate drop of 3.4%.
Despite these figures, investors are being cautioned to maintain vigilance, as a slowdown in the Chinese economy could potentially trigger future challenges. This concern holds particular relevance for companies with substantial weightings in the index, such as Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), Amazon.com (NASDAQ:AMZN), Alphabet (NASDAQ:GOOGL), Tesla (NASDAQ:TSLA), and Meta Platforms (NASDAQ:META). These seven major corporations derive more than 10% of their revenue from China. Consequently, while the overall risk to the index appears relatively limited, pockets of risk and volatility may emerge should a significant Chinese economic slowdown occur.
Certain industries, including technology, automotive, household products, and pharmaceuticals, exhibit a higher-than-average exposure to China, which could translate into an uncertain profit outlook. Moreover, some U.S. businesses are at even greater risk, as they derive over 30% of their revenue from China. This category encompasses companies such as Las Vegas Sands (NYSE:LVS), Aptiv (NYSE:APTV), Estée Lauder, Lam Research Corp (NASDAQ:LRCX), Western Digital Corp (NASDAQ:WDC), and Micron Technology (NASDAQ:MU).
Despite recent positive news concerning Chinese retail sales and industrial production, investors continue to exercise caution. In the month of August alone, foreign investors withdrew nearly $15 billion from Chinese stocks. While U.S. stocks have, thus far, managed to evade the volatility experienced by offshore Chinese counterparts this year due to optimism regarding economic recovery, companies with substantial exposure to China may continue to be perceived as less attractive by certain investors.
