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Wow, Europe isn't growing much. While the recent economic data coming out of the Euro-Zone has been horrible, many industry leading U.S. and companies heavily levered to the Euro-Zone such as Microsoft (NASDAQ:MSFT), Intel (NASDAQ:INTC), IBM (NYSE:IBM), and even Apple (NASDAQ:AAPL), have reported fairly stabile earnings in Europe.

Today, S&P 500 earnings directly from the Euro-Zone are generally estimated to range from around 8-10% of the S&P revenues come from direct sales to Europe. S&P 500 earnings have generally grown at around 6% year-over-year, with major industrial and financial companies such as Citigroup (NYSE:C) and GE (NYSE:GE) showing impressive year-over-year growth.

The S&P 500 and its tracking exchange traded fund SPY (NYSEARCA:SPY), has also rallied hard since the summer lows of last year, even as the economic data in Europe has remained weak, and most major European indexes, such as the DAX, have consistently underperformed the broader U.S indexes.

While, obviously, Europe is a major trader with a number of other economies, to whom the S&P 500 is leveraged to as well, most major U.S. companies are more tied to Asia than the Euro-Zone today.

So, why is Europe weighing so heavily on the equities around the world. I think it is because of the Euro.

Economic activity in the Euro-Zone has remained tepid for some time, still prior to this past year, the Obama and the Bernanke were committed to pursuing aggressive forms of fiscal and monetary policy. Now, with the tea party running the House of Representatives, the U.S. in an election year, and the job market still weak despite nearly 2 years of aggressive stimulus, the Fed has not pursued any new monetary stimulus programs of recent.

Additionally, while the U.S. long-term budget deficit is still very high, the budget deficit actually decreased this year, and since the tea party took over the House in 2010 no new spending increases of significance have been announced. The U.S. is also in the process of drawing down its forces in Afghanistan.

Technically, the dollar is breaking out as well.

While the dollar fund (NYSEARCA:UUP) looks slightly overbought in the short-term, the double bottom at around the 21.80 level, and the recent breakout, are telling.

The Fed is also no longer publicly reaching out to the European Central Bank. While operation long-term refinance was a European operation, the IMF has a huge position in the European debt market, and the Fed was working with the ECB on backstopping loan to the U.S. prior to the announcement of the program as well. Europe's new head of the central bank, Dragi, had also signaled a willingness to pursue more aggressive monetary policies

With France having just had major elections, elections in Europe coming up, and the U.S. presidential election occurring later this year, central banks seem unwilling to take aggressive new actions while political leaders are still trying to establish their position.

Indeed, while the Euro rose significantly from September to January on the announcement of operation long-term refinancing and the improving growth outlook, growth has slowed, and the recent spike in Spanish yields showed the limits of the current ECB debt refinancing effort.

While in the past even minor ECB announcements were enough to scare shorts and spike the Euro, today the financial community has little fear of any major new announcements coming from the Fed or ECB. With the Fed on hold, China refusing to float the country's currency, and Japan's debt problems and growth rate looking troubling, the dollar rise significantly capital continues to come to the U.S.

While only around 10% of S&P 500 earnings comes directly from sales to Europe, nearly every major commodity is still denominated in dollars, and the energy sector, largely comprised of oil companies, comprises nearly 20% of the market. Oil prices have also already been weak on rising inventories and recent news that Iran is being more cooperative with the international community. Copper prices has also continued to fall as the economic data as weakened in China, and buyers in China were reported to be defaulting on major orders for bulk metals such as iron ore, and soft commodities such as soy boys.

Many big cap tech companies such as Microsoft, Intel, Apple, and IBM, also generate significant revenues from Europe as well.

To conclude, with leading economic indicators in China suggesting the world's second largest economy's real estate and construction sector continues to slow, jobs growth in the U.S. tepid, and corporate earnings season finished, the market will likely lack major catalysts over the next several months.

While Euro-Zone growth has been weak for some time, the Euro has held up fairly well over against the dollar. Spending policies and stimulus efforts may change after the elections. Still, it is unlikely that Obama or Bernanke would pursue a major new fiscal or monetary effort during an election year.

With few S&P 500 companies are heavily levered to the Euro-Zone directly, a rising dollar and weak economic data could cause commodity prices to drop significantly. Iran no cooperating with oil inspectors and growth remaining weak, oil and other commodities could be significantly impacted by a strong move in the currency markets.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: Why Europe Could Cause The Next Down Leg In The Market Even As The European Economy Remains Stabile