As the global economy continues to recuperate from the effects of the pandemic, China, the world’s second-largest economy, is experiencing a sluggish postpandemic recovery. While this might not have a significant impact on the S&P 500, it is crucial not to overlook the underlying details.
According to a research note by Citi’s Scott Chronert, China’s contribution to the aggregate revenue of companies in the S&P 500 stands at approximately 5%. This means that while concerns exist regarding the slowdown of China’s macro conditions, it is unlikely to alter our views on US equity.
Even in a worst-case scenario where all China revenue vanished, it is estimated that S&P 500 earnings would decline by about 7%. Although this would be painful, it is not a catastrophic outcome. Alternatively, a 5% decrease in China revenue would only result in a minor 0.3% decline in earnings per share for the index. However, if half of all China revenue were to disappear, the S&P 500 EPS would drop by approximately 3.4%, highlighting the significance of China’s economic performance.
Nevertheless, investors should not be complacent. The strategist emphasizes the potential for future issues arising from the knock-on effects of a slowdown in China. Thus, it is important to remain vigilant and closely monitor developments in this regard.
China’s Revenue Risk for S&P 500 Companies
Only 5% of the S&P 500’s revenue is tied to China, but the risk is higher for companies with significant weightings in the index. Tech giants like Apple, Microsoft, Nvidia, Amazon.com, Alphabet, Tesla, and Meta Platforms derive more than 10% of their revenue from China. While the fundamental risk at the index is relatively small, there may be pockets of risk, volatility, and dispersion if China experiences a more material slowdown.
Tech Giants and Industries with Higher Exposure
The presence of these tech heavyweights underscores the fact that certain companies, as well as industries like autos, household products, and pharma, have above-average exposure to China. This exposure could result in a shakier profit outlook for these businesses.
Businesses at Higher Risk
A third category of businesses face even greater risk. Some U.S. companies rely on China for 30% or more of their revenue. This group includes Las Vegas Sands, Aptiv, Estée Lauder, Lam ResearchCorp, Western DigitalCorp, and Micron Technology.
Investors are wary of the situation. Despite positive news about Chinese retail sales and industrial production in recent weeks, China stocks are still in a “wait-and-see” mode according to Doug Young, director of Hong Kong-based Bamboo Works. In August alone, foreign investors withdrew nearly $15 billion from Chinese stocks.
Market Analysis: U.S. Stocks vs Chinese Equities
While U.S. stocks have managed to maintain a certain level of stability in comparison to the volatile offshore Chinese equities throughout the year, there are still concerns among investors regarding China’s economic recovery and the government’s response to it. As a result, some investors may perceive companies with significant exposure to China as less appealing.