Brace Yourself For A Rough Q2 Earnings Period

Brace yourself for what might be the roughest earnings season the U.S. has experienced in more than three years. Ahead of the a month-long financial show and tell for S&P 500 companies have not been this dour about their results since Q4 2008 according to JP Morgan analysts, in a note to clients. They say negative-to-positive earnings preannouncements are now running at a 3.6-to-1 clip. Just a quarter ago, negative-to-positive pre-announcements were a 60-40 split. S&P 500 earnings growth would be pretty much nil if you were to take away Apple

and Bank of America

, two companies expected to have among the largest positive earnings influence, according to Thomson Reuters. Here are the five themes likely to garner attention as the Q2 earnings season gets under way: U.S. rules, Europe drools Potential weakness in Europe is the main reason the 85 S&P 500 companies that have warned for Q2. That could weigh on stocks such as Philip Morris

, McDonald's

, and Ford Motor

, Honeywell

, General Electric

, Coca-Cola

– all of which have 20% or more of their revenue tied to the troubled continent. That could be a positive, though, for U.S. companies with positive trends that have little to no European ties. For that reason, homebuilders including KB Home

, Lennar

, Toll Brothers

as well as mortgage lender Wells Fargo

could be stocks to watch for earnings upside. More than a dozen major housing markets saw a double-digit rise in listing prices in May. And Wells Fargo

boosted mortgage loans 30% in the previous quarter. Be aware, however, that many of those stocks have already seen strong gains off the early June lows. Consumer Discretionary crap shoot The back-to-school season is now a question mark. Consumer Discretionary companies were among those seeing the biggest increase in earnings warnings. Nike's

earnings report in late June laid the foundation for the sector's worries. It expects China's economy to slow, labor and commodity costs to be all over the map, and continued currency pressures in Europe. It certainly doesn't help that consumer confidence moved to a 6-month low in June. Even the domestic retailers -- Target

, Macy's

and Costco

– all posted disappointing sales comps. The one relatively safer haven among the discretionary companies could be the luxury players, including Tiffany & Co.

and Coach

in the U.S., and possibly even ones with much closer ties to Europe including Prada

and Richemont Swatch Group

. Financials may see setbacks JP Morgan

and its potential trading loss has the potential to being one of the largest negative influences on overall S&P 500 earnings. That's hardly the only obstacle faced by the big banks, though. Morgan Stanley

and Goldman Sachs

the two largest investment banks, may be hard-pressed to see significant trading profits due to low trading volumes. Another potential profit source for the money-center banks – M&A activity – rose 10% sequentially in the second quarter, according to Ernst & Young data. It marked the first increase in the past five quarters. Still, the Euro Zone remained weak, and deals took a long time to complete. Meanwhile, the Facebook IPO

cast a pall on other potential debuts led by the big banks, and possibly helped to stall the pipeline. One financial group that might be less volatile is the regional banks, including Cincinnati Financial

and New York Community Bancorp

, which is closely tied to a potential NYC housing recovery. Tech guidance will be key Tech remains the largest group in the S&P 500, and it is encouraging that Texas Instruments

was among the minority of companies that preannounced to the upside. Google

will be among the first of the big tech companies to report, followed by Intel

, Yahoo

, IBM

Ebay

and Microsoft

the week of July 17. No big tech companies that reported in May and June had extremely positive results. And it remains to be seen if Facebook

can beat expectations in its very first public report, scheduled for July 26. Guidance may be the key for the group, especially from companies like IBM that touch nearly every sector of technology. Gartner is still anticipating a 3% increase in global tech spending this year, although it acknowledges that challenges including the euro zone crisis, a Chinese economic slowdown, and a weaker U.S. recovery warrant continued spending caution. CEO expectations for sales, hiring and capital spending over the next six months all softened in the second quarter, according to the latest Business Roundtable Economic Outlook Survey. Utilities may offer predictability Yes, they can be boring investments. But utilities have been among the strongest stock groups this year. Many investors are using them as yield alternatives right now – a place to hide out until there is more certainty with riskier stock investments. Many are paying double the yields of a U.S. Treasury right now. And some are paying yields near 6%, including Universal Health Realty Income Trust

, Colony Financial

and CapLease Inc.

. There should be fewer earnings surprises either way with utilities as a group.