The potentially growing trade war between the United States and China is straining businesses and creating uncertainty, a potentially disastrous mix for stock prices, market analysts say.

In a note to clients on Wednesday, equity analysts from Jefferies said that recent surveys are increasingly showing unease among top executives at large companies.

“The temperature is changing coming into the U.S. mid-term elections,” Jefferies’ Sean Darby said in the note with the firm’s equities team that highlighted increasing worry about the scope of U.S. foreign policy.

“Our earlier optimism that a trade war would be averted in May were quickly dashed despite warm discussions between US Treasury Secretary Steven Mnuchin and China Vice Premier Liu He,” he continued.

Further, there was worry about how the “trade dispute quickly flared into a trade war,” the note said. “The bottom line is that trade wars are akin to zero-sum games or mutually assured destruction.”

A “suicide pact”?

Goldman Sachs CEO Lloyd Blankfein, who is preparing to leave the company after 12 years at the helm, gave a similar assessment of the prospect of an all-out trade war during remarks on Tuesday during a talk in New York, calling it a “suicide pact.”

“I suspect that we’re not going to cause the economies to collapse with a Smoot-Hawley on steroids,” Blankfein said, referring to the 1930s protectionist law that brought import taxes to historic levels and many historians believe significantly worsened the Great Depression.

Blankfein also said he believes the ratcheting up of proposed sanctions on China is part of a negotiating tactic by Trump, and it may be similar to recent talks with North Korea, which included “a lot of bluster.”

While his initial comments were critical, Blankfein added, “I can’t say as a lot of people do that this makes no sense at all,” noting that China exports significantly more the United States than the U.S. does to China.

In that regard, the president’s strategy of threatening further sanctions on Chinese goods if Beijing responded to U.S. tariffs with their own, as the Chinese government has threatened to do is not entirely without merit, he said.

“That’s what you would do if you were crazy and really wanted to end free trade and that’s what you would do if you wanted to remind your negotiating partner of the fire power you could bring to a trade fight,” he said.

Economic consequences

Brett Ryan, senior economist at Deutsche Bank Securities and the firm’s equities team, said in a note to clients that “further escalation of the trade dispute” could reduce real gross domestic product growth by $40 to $50 billion a year, or 0.2 to 0.3 percentage points, according to the most recent U.S. GDP estimates from the Bureau of Economic Analysis.

Slok estimates the “tax” on imported goods from China could also increase inflation by 0.15 percentage points, according to the personal consumption expenditures price index, the Federal Reserve’s preferred method of inflation calculation. Economists expect the core PCE price index will rise above its the Fed’s 2 percent target this year, absent the impacts of a trade war.

Ryan said Deutsche’s equities team expects the trade war could also pull down earnings growth, anticipating a 0.2-0.3 percentage point loss for S&P 500 earnings growth.

“While the indirect effects of uncertainty and hit to business confidence are harder to gauge, [the equities team sees] corporates responding by putting more of their cashflow towards share buybacks, the primary driver of equities in this cycle from a demand-supply perspective,” he said.

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Dion Rabouin is a markets reporter for Yahoo Finance. Follow him on Twitter: @DionRabouin.

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