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Analysts have pared profit expectations for US companies by the most in three years as the trade war with China and a dimming economic outlook weigh on earnings and expansion plans. Companies in the S&P 500 index will increase profits 2.4 per cent on a per-share basis this year, down from the 7.7 per cent growth expected at the start of the year, according to FactSet data. The 5.3 percentage-point drop in full-year earnings expectations marks the largest decline on a year-to-date basis since 2016. “The corporate sector is displaying worrisome symptoms,” Lydia Boussour, senior economist for Oxford Economics, wrote in a note to clients last week. “With global growth slowing sharply, and domestic activity cooling, further profit weakness represents a risk for business investment and hiring — a key support to consumer spending.” Second-quarter profits for companies in the S&P 500 are down 0.4 per cent on a per-share basis with 96 per cent of companies having reported. A contraction would mark an “earnings recession” of two consecutive quarters of negative earnings growth after profits slipped 0.2 per cent in the first quarter, according to FactSet data. Companies that have scaled back profit guidance in the second quarter include Macy’s, Home Depot, Caterpillar and, on Tuesday, pet food company JM Smucker.

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Trade tensions between the US and China escalated last week when Beijing said it was preparing to slap tariffs on $75bn of US imports, and President Donald Trump responded with a plan to increase levies on Chinese goods and what he called an order for US companies to “immediately” find alternatives to China. Shifting US operations out of China would increase costs for companies, said Alicia Levine, chief market strategist for BNY Mellon Investment Management. “Changing supply chains will impact margins,” she said. “Given where the global economy is and the pain points, I expect [corporate profit estimates] will come down.” The lower profit outlook follows anaemic growth in US capital spending this year after a surge in 2018 when lower corporate taxes came into force.