SHANGHAI (Reuters) - The China-U.S. trade war is souring the profit and investment outlook for U.S. companies operating in the world’s second-biggest economy, a survey by a prominent American business association showed.

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The annual poll by the American Chamber of Commerce in Shanghai found that while most of its member companies remained profitable in 2018, the number reporting revenue growth fell. Projections for future revenue also dropped, highlighting the corrosive impact of the escalating tit-for-tat tariffs.

Five-year optimism sunk for the first time since 2015, when China’s stock markets nosedived and the authorities fumbled their response.

“Revenue growth projections have lowered, optimism about the future has waned, and many companies are redirecting investment originally planned for China,” AmCham said in a report on the survey published on Wednesday.

The downbeat results come as U.S. and Chinese negotiators prepare to meet in Washington in October in stop-start efforts to de-escalate the year-long trade row. With little progress to show so far, market expectations for a breakthrough in the discussions are low.

“With no sign of a trade agreement, 2019 will be a difficult year; without a trade deal, 2020 may be worse,” the AmCham report said.

Most AmCham member companies were against the use of tariffs to handle trade disputes, with three-quarters of respondents saying they were opposed.

The survey was conducted between June 27 and July 25 - before the latest round of tariff increases took effect - and received 333 responses, AmCham said.

Over a quarter of poll respondents said they had redirected investments originally planned for China to other locations – up 6.9 percentage points from the previous year. Southeast Asia was the top destination, followed by India.

Investment redirection was most prominent in technology, hardware, software and services, with 40% saying they had done so, according to the survey.

Moreover, decreases in investment have accelerated in 2019, underscoring the pressure on China’s economy, which grew at its slowest pace in almost 30 years in the second quarter.

The survey showed a 14.4 percentage point fall in the number of companies anticipating increasing investment, and a 12.2 percentage point increase in the number of companies planning to decrease investment compared to 2018.

The gloom was taking a toll on employment.

Nearly 20% of companies said they were cutting headcount in 2019, compared to just shy of 10% last year, while the number of companies that said they were increasing headcount slipped by 17.8 percentage points.

Beside the trade war, the slowing Chinese economy clouded the outlook and was named as the greatest three- to five-year challenge by almost 60% of companies - up 22.5% from last year.

Still, AmCham said there were “pockets of optimism” in its survey results, with corruption and fraud reported to have declined, while government bureaucracy became more efficient and the regulatory environment improved.