INVESTMENT FOCUS-Flying into the fog of European earnings season

* Q2 earnings in Europe expected to fall 8.5 pct: TR data

* Investors pull record amounts from European equity funds

* Europe EPS forecasts: http://reut.rs/2553txN

By Atul Prakash and Vikram Subhedar

LONDON, July 22 (Reuters) - EasyJet (Other OTC: EJTTF - news) 's admission this week that it was unable to give an earnings forecast in the near-term underscores the predicament investors face as corporate results season gets underway next week in Europe.

Earnings at Europe's largest companies are expected to fall nearly 9 percent overall, according to Thomson Reuters (Dusseldorf: TOC.DU - news) data, although investors are focusing more on what corporates are signaling for the next few quarters and on any potential impact from Brexit.

If companies are unable to predict their performance, however, the task for stock pickers and analysts trying to factor in a slew of risk factors becomes much tougher.

A sluggish economy, worries over the health of the banking system and a lack of earnings growth all exacerbated by doubts over the impact of Brexit has dimmed the appeal of European shares, which are underperforming peers on Wall Street. The S&P 500, for example, hit a record high this week.

Europe's STOXX 600 is down more than 7 percent this year.

Investors pulled a record $6.2 billion from European equity funds last week in the 24th successive week of outflows, data from EPFR and Bank of America Merrill Lynch showed.

Earnings season presents another test for already weak investor confidence.

"Valuations are becoming even more stretched relative to fundamentals than they were, and that's not a particularly healthy place to be," said Peter Dixon, an economist at Commerzbank (Xetra: CBK100 - news) .

European earnings are expected to contract for the fourth year in the past five in 2016. Yet valuations, at 14.8 times forward earnings, are more than 23 percent above their average over the past decade.

"When investors realize just how far they are pushing things, they might want to rethink things," Dixon added.

The energy sector, hobbled by weaker crude prices a year ago, are expected to show the sharpest declines in earnings and revenue for the second quarter, Thomson Reuters data shows, followed by telecoms, technology firms and industrials.

Revenue is expected to decline by 6 percent in the second quarter for the Stoxx 600 companies.

A preliminary survey of purchasing managers in UK conducted by Markit (NasdaqGS: MRKT - news) fell by the most in its 20-year history and is already indicating the threat of a recession, suggesting companies will find it harder to grow.

Robert Parkes, an equity strategist at HSBC, says earnings downgrades are likely to spill over into next year too.

"Companies are not giving any guidance, so it's difficult for analysts to change their numbers. Some analysts could wait until Q3 results when companies might give more guidance in terms of how much Brexit has affected their businesses," Parkes said.

(Editing by Vikram Subhedar)