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Chronert further pointed out that a total loss of revenue from China would result in about a 7% decrease in the S&P 500 earnings, a substantial but not disastrous scenario. A 5% reduction in revenue from China would lead to a slight 0.3% decline in earnings-per-share (EPS) for the index. If half of all revenue from China were eliminated, the S&P 500 EPS would drop by approximately 3.4%.
However, investors are advised to stay vigilant as a slowdown in China could potentially cause future problems. 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:GOOGL), Tesla (NASDAQ:TSLA), and Meta Platforms (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 minor, there might be pockets of risk and volatility if there’s a significant slowdown in China.
Certain industries like tech, autos, household products, and pharma have a higher-than-average exposure to China which could lead to an unstable profit outlook. Furthermore, some U.S. businesses are at an even greater risk as they derive over 30% of their revenue from China. These include 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 about Chinese retail sales and industrial production, investors remain cautious. In August alone, foreign investors withdrew nearly $15 billion from Chinese stocks. While U.S. stocks have so far avoided the volatility experienced by offshore Chinese counterparts this year due to hopes of economic recovery, companies with substantial China exposure may continue to be viewed as less attractive by some investors.
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