MORGAN STANLEY: These are the 4 biggest risks keeping analysts and economists up at night

First-quarter earnings growth for small and mid-cap companies fell by double-digits in 2019, while earnings from large-cap stocks stayed flat, according to Morgan Stanley.

"Additional Fed cuts/easing will not be able to fix the corporate profit problem of deteriorating margins, slowing demand, and trade-related pressures," chief investment officer Mike Wilson said in a research note to clients on Wednesday.

Small and mid-cap stocks are also underperforming the broader market this year. The Russell 2000 index, which tracks 2000 of the smallest companies in the stock market, is up about 9% so far this year, while the S&P 500 is up roughly 14%.

Despite the US economy reaching historically low unemployment, small and medium-sized businesses are putting the brakes on hiring, according to Morgan Stanley's chief US economist.

"The first cut is hours worked as companies cut hours of current staff before laying people off," Ellen Zentner, the firm's chief US economists said in a note to clients on Wednesday. "This is starting to show up in the data even if we haven't seen jobless claims pickup yet."

Zentner also said he expects weaker sentiment and lower spending in August as market volatility typically goes hand in hand with decreases in consumer spending.

Uncertainty from the trade environment is propelling a slowdown across multiple industries, according to Morgan Stanley's economists.

"If the US were to implement 25% tariffs on all imports from China for 4-6 months and China responds with countermeasures, the global economy will likely enter a recession in 3 quarters' time," Ahya said.

Many US retailers and manufacturing companies either lowered their sales guidance for the year or mentioned the trade war as a continuing challenge in the macro environment during the second-quarter earnings season.