All signs point to an escalation of the trade war between the United States and China, the world's two-largest economies. President Donald Trump tweeted Sunday that he would seek to increase tariffs to 25% on $200 billion worth of Chinese goods starting at 12:01 a.m. ET Friday due to China pulling back on trade promises. China is still sending a delegation to negotiate this week, but right now it looks like an all-out trade war is about to begin. The worst-case outcome there, say experts, is a fight that sends the S&P 500 into a correction — which would be 10% off that key indicator. The companies likely to be hardest hit, say the experts, are likely Boeing, Apple and Caterpillar. They are all down about 5% this week already. Then the pain ripples into the metals, mining and automobiles sectors. "Fasten your seatbelt and don't hold your breath," Bank of America strategists wrote in a note this week. "The latest escalation of the trade war was completely unexpected, despite the strength of the economy and the markets."

Stock market impact

Global equities have been on edge this week after Trump tweeted Sunday that the current 10% tax on $200 billion worth of Chinese goods will rise to 25% on Friday. The Dow Jones industrial average is down about 450 points this week, while the S&P 500 shed 1.9%. "With risks having increased, it is worth asking where the largest asset market moves could occur if trade tensions were to rise further," Keith Parker of UBS wrote Tuesday. Source: UBS For its part, Bank of America Merrill Lynch said its bear case includes a U.S. tariff hike and a response from China on U.S.-made cars. Beijing could also decide to buy more soybeans from Brazil instead of the U.S., putting the pressure on farmers throughout the country. An inflamed trade war would have sizable impacts on European and Asian markets, too. Based on models complied by UBS' Parker, the Stoxx 600 index — which tracks large-, mid- and small-capitalization companies among 17 European countries — could see another approximate slide of 7% if trade tensions worsen. The index is already 3.3% off its 52-week high. WATCH: Jeremy Siegel: 'Big blow to the markets' if trade deal falls apart

Economic impact

He added that a full-blown trade war would shave off 45 basis points from global economic growth, while China's GDP would take a hit of between 1.2% and 1.5%. For his part, Morgan Stanley's head of U.S. public policy strategy, Michael Zezas, wrote that while his base case expects China's GDP growth to recover to 6.5% in the second and third quarters, a U.S. tariff hike could cut that estimate by 0.3 percentage point. "While we expect a re-escalation would be temporary, as market weakness would help bring both sides back together, any escalation inherently augments uncertainty and further undercuts risk markets," Zezas said. Further, if China responds by raising its weighted tariffs on $60 billion of U.S. goods to 15% from the current 7%, that could reduce U.S. GDP by 0.1 percentage point. "Negative surprises like a potential re-escalation of trade tensions can have a greater price impact than fundamentals might dictate," Zezas told clients. "Near-term downside risk for Chinese equities onshore and offshore could be down 8% to 12%, arguably the biggest among major markets we cover."

Will Fed step in?