As the earnings season is picking up in high gear, David Rosenberg directs investor attention on the true state of earnings growth. According to his estimates, once Financials are stripped out, revenue growth is negative.

Gluskin Sheff: “It’s still relatively early in the Q4 earnings season, with about 20% of S&P 500 companies reporting. We’ll have a better view on Q4 earnings after next week as 130 S&P companies and 12 Dow companies report.

On the surface, earnings results have been strong with a blended earnings growth rate at 193% year-over-year, up 9 percentage points over the past week, and 11 percentage points from the start of reporting season (according to Thomson Reuters). But the headline is a tad misleading. Outside financials, which are bungee jumping off a super-depressed based of a year ago earnings, are tracking 9% YoY.

So far, nearly 80% of companies that have reported have beat expectations, which is significantly above the long-run average of 60%. On average, companies have beat analyst expectations by about 21% (long-term average is 2%).

While earnings have been strong, revenue results have lagged. On this basis, the blended rate is 5% year-over-year, which is lower than last week’s rate of 7%. Once Financials are stripped out, revenue growth is sitting at the grand total of 0% — down a percentage point from a week ago even as bottom-lines improved. The question going forward is how much more companies can cut costs – at some point sales need to increase in order to increase earnings (have a look at “The Great Corporate Pullback” on page B2 of today’s WSJ). We have likely reached that point, and investors can sense it.

In terms of sectors, Financials, Materials and Consumer Discretionary have the highest earnings growth (although Howard Silverblatt at the S&P cautions that the Financials sector is fraught with pro-forma, restatements and membership changes). Energy and Industrials have the lowest growth rates (-24% and -13%, respectively). On the revenue side, outside of the Financials sector huge 73% increase (which is actually 10ppt lower than last week), Health Care is the top sector with +9% expected revenue.”

[emphasis added]