China’s Economy Is Getting Slammed. The S&P 500 Could Take the Next

European sectors with exposure to China such as construction materials, mining, autos, and consumer durables like luxury goods, are already lagging far behind the market,

Bank of America

strategist Savita Subramanian wrote in a recent note to clients. Forward price-earnings ratios for construction materials, mining and autos in Europe are near historic lows. Stocks with the biggest exposure to China—such as the miners BHP Group (BHP) and Rio Tinto (RIO), as well as luxury-goods makers like

Swatch Group

(UHR.Switzerland) and Cie. Financière Richemont (CFR.Switzerland)—are among the hard-hit.

That is in contrast to U.S. companies with heavy China exposure. Subramanian says valuations for companies with a lot of sales to China have declined less than for the overall market, leaving the bank’s basket of companies with the most exposure trading at a 20% premium to their peers—without even counting Tesla (TSLA), a highly valued company with a hefty business in China. The dominance of technology in the U.S. stock market and expectations for a capital-spending boom that would aid some of those companies may be behind the U.S. market’s resilience, but Subramanian still sees a problem.

“This risk premium seems too low, especially in light of our economists’ bear case scenario” for China’s economy, Subramanian wrote.

The pain could be sharp. Bank of America economists are bearish. They reduced their estimates for China’s economic growth by 0.3 percentage point for this year, and by 1.3 points for next year, leaving their calls near the low end of the range of what economist expect. Their concern is that  Chinese authorities have been too slow in responding to the slowdown by adjusting monetary or fiscal policy. Their stoicism in the face of the recent weakness suggests to the economists that this could mark a “once-in-two decades restructuring of the Chinese economy,” the firm’s Asia strategists wrote in a separate research note. “If so, the data…