If Morgan Stanley analysts are right, stocks are headed for bigger and longer-lasting losses, because of the deepening U.S.-China trade war.

“Tariff escalation is no longer hypothetical … Economic impacts are not in dispute, only their size,” write Morgan Stanley analysts.

They expect further declines in U.S. equities primarily because of supply chain disruptions caused by the escalating trade war.

“This is a material potential drag on earnings growth that will be harder to mitigate than the market expects as other costs rise in tandem,” according to the analysts, who note that companies are already contending with rising costs for labor, energy, materials and borrowing.

To date, the U.S. has imposed tariffs on $250 billion worth of China imports and the White House has threatened to extend that to tariffs on an additional $267 billion worth of Chinese imports. The U.S. is also set to increase tariffs on $200 billion of Chinese imports from 10% currently to 25% on Jan. 1.

China has responded with tariffs on U.S. imports, including Harley-Davidson motorcycles and soybeans, whose exports to China have declined by 94%.

Meanwhile, hopes for a de-escalation of tensions between the world’s two largest economies are fading.

A recent summit between U.S. Vice President Mike Pence and Chinese President Xi Jinping in Papua New Guinea over the weekend ended without a joint communique for the first time in its 29-year history, and a speech by Pence restated President Trump’s intent to more than double tariffs on Chinese imports. Trump and Xi are expected to meet next week at the G-20 summit in Buenos Aires.

Twenty-five percent tariffs on all U.S. imports from China could cost 1% to 1.5% of net income for the S&P 500 for 2019, with autos, electrical equipment and machinery, textiles, computers/electronics, and certain chemical and commodity sectors most vulnerable, according to Morgan Stanley analysts. JPMorgan economists expect global GDP would fall by 0.1% to 0.4% due to increased tariffs, including tariffs from the European Union.

The analysts explain that companies will not be able to offset higher tariffs by raising prices or cutting costs because of other cost pressures. Nor will they be able to avoid tariffs by moving supply chains, which is difficult and time-consuming. “There’s no ‘plug-and-play’ alternative available in other countries given China’s sizable skilled labor force and world-class infrastructure,” they write.

Evading tariffs is also not “not a realistic possibility,” according to Morgan Stanley analysts, because customs agents inspect enough cargo to pose a risk that any company with “a meaningful amount of importing” could get caught.

Among the companies that will most affected by escalation of tariff tensions are Apple, Seagate Technology, HP and Sonos.

— Check out Goldman Says It’s Time for Equity Investors to Boost Their Cash on ThinkAdvisor.