Despite the slow pace of China’s ongoing economic recovery, the S&P 500 may not be significantly impacted. It was reported on Monday that Chinese operations account for only 5% of the total revenues of companies listed in the S&P 500, according to Citi’s Scott Cronert.
Cronert further noted that the total loss of revenue from China would result in a roughly 7% decline in S&P 500 earnings, which is a substantial but not catastrophic scenario. A 5% decline in revenues from China would result in a modest 0.3% decline in earnings per share (EPS) for the index. If half of total revenues from China were eliminated, S&P 500 EPS would decline by approximately 3.4%.
However, investors are advised to remain cautious as a slowdown in China could potentially cause problems in the future. This is particularly relevant for companies with significant weightings in the index, such as Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), Amazon.com (NASDAQ:AMZN), Alphabet (NASDAQ:MSFT). :GOOGL) ), Tesla (NASDAQ:TSLA), and Meta Platform (NASDAQ:META). These seven major companies earn more than 10% of their revenue from China. Therefore, while the overall risk to the index is relatively modest, there could be room for risk and volatility if a significant recession occurs in China.
Some industries like tech, auto, household products and pharma have higher-than-average investments in China, which could make the profit outlook shaky. Furthermore, some US businesses are at even greater risk because they derive more than 30% of their revenues from China. These include Las Vegas Sands (NYSE:LVS), Aptiv (NYSE:APTV), Estée Lauder, Lamm Research Corp (NASDAQ:LRCX), Western Digital Corp (NASDAQ:WDC), and Micron Technology (NASDAQ:MU).
Despite recent positive news about Chinese retail sales and industrial production, investors remain cautious. In August alone, foreign investors pulled out about $15 billion from Chinese stocks. While US stocks have so far avoided the volatility experienced by offshore Chinese counterparts this year due to expectations of an economic recovery, companies with substantial investments in China may be considered less attractive by some investors.
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