China’s sluggish postpandemic economic recovery isn’t likely to hurt the S&P 500, but that doesn’t mean investors should shrug it off. The devil is in the details.
Though it is the world’s second-largest economy, China accounts for only about 5% of the aggregate revenue for companies in the
S&P 500,
Citi’s
Scott Chronert said in a research note Monday. The upshot, he said, is that “slowing in China macro conditions are a concern, but are unlikely to change our US equity views.”
If all China revenue disappeared, S&P 500 earnings would fall by about 7%, he estimated, in a painful but not catastrophic worst-case scenario. A 5% decline in China revenue would lead to just a 0.3% earnings-per-share decline for the index, while S&P 500 EPS would fall by about 3.4% if half of all China revenue were taken away, Chronert said.
Still, investors shouldn’t be blasé, “given [that] the knock-on effects from a slowdown in China” could create issues in the future, the strategist said.
While only 5% of the S&P 500’s revenue is tied to China, the risk is higher for companies with the biggest weightings in the index, such as
Apple
(ticker: AAPL),
Microsoft
(MSFT),
Nvidia
(NVDA),
Amazon.com
(AMZN),
Alphabet
(GOOGL),
Tesla
(TSLA), and
Meta Platforms
(META). “The ‘Big 7’ derive more than 10% of their revenue from China, so although the fundamental risk at the index is relatively small in scope, there may be pockets of risk, volatility, and dispersion in the event of a more material slowdown in China,” he said.
That tech-heavy lists highlights the fact that those companies and some industries—particularly autos, household products, and pharma—have above-average exposure to China that could lead to a shakier profit outlook.
A third category of businesses are even more at risk. U.S. companies that get 30% or more of their revenue from China include Las Vegas Sands (LVS),
Aptiv
(APTV),
Estée Lauder
(EL),
Lam ResearchCorp
(LRCX),
Western DigitalCorp
(WDC), and
Micron Technology
(MU).
Investors are skittish. Although last week brought positive news about Chinese retail sales and industrial production, China stocks are still stuck in “wait-and-see” mode, Doug Young, director of Hong Kong-based Bamboo Works, wrote on Monday, noting that foreign investors pulled nearly $15 billion out of Chinese stocks in August.
While U.S. stocks have been spared the volatility of their offshore Chinese counterparts this year, with gains triggered by hope for an economic recovery repeatedly wiped away by concern over government inaction, some investors will continue to see those with substantial China exposure as less attractive, Young said.
Write to Teresa Rivas at [email protected]
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