By Nick Godt

With the third-quarter earnings season just about to kick off, the market is looking to some sectors, such as financials, where revenue growth might actually improve.

In the previous quarter, investors were satisfied with seeing improvement in firms' net income, the so-called bottom line, which was mostly the result of heavy cost-cutting to adapt to a slumping global economy.

"Companies have undergone a fantastic run of cost-cutting which will surely benefit the bottom line to a larger than normal degree when top-line growth returns," said Dan Greenhaus, chief economist strategist at Miller Tabak, in a note.

"Given the improvement in the economy as well as the equity market, perhaps a wealth-effect flow-through, this could very well be the quarter in which revenue growth returns," he said.

Financials, which suffered the brunt of the credit crisis of the past two years, might be among the sectors where surprises start to emerge.

On Monday, Goldman Sachs upgraded its view of large banks, highlighting an improvement in Wells Fargo's (WFC) capital position as well as its takeover of Wachovia. Goldman also added Capital One (COF) to its conviction buy list, saying it expects a positive revenue surprise from the bank, citing moderating consumer credit problems.

The financials sector, freed from the write-downs that crippled results last year, is expected to be the best performer this quarter, with earnings on average expected to be up by 59% from the year earlier, according to Thomson Reuters.

On Monday, the Dow Jones Industrial Average (DJI) gained 118 points, or 1.2%, to 9,606. The S&P 500 index (SPX) rose 15 points, or 1.5%, to 1,040, while the Nasdaq Composite (RIXF) added 21 points, or 1%, to 2,069.

Greenhaus also takes heart from the big 2.7% surge in U.S. retail sales in August. While the government's cash-for-clunkers largely helped boost autos sales at the likes of Ford Motor Co. (F), sales ex-autos also rose a hefty 1.1%.

Sales at clothing stores, department stores, sporting-goods stores, and book stores were up more than 2%, and electronics retailers also saw 1.1% increase.

"We don't have the September sales yet, but based on [August] perhaps the consumer discretionary sector did better [this quarter]," Greenhaus said. "It's tough to predict a consumer-based recovery, which is the main determinant of top-line growth."

Among consumer-discretionary firms slated to report this week are Yum Brands Inc. (YUM) on Tuesday as well as Costco Wholesale Corp. (COST) and Family Dollar Stores Inc. (FDO) on Wednesday, while Marriott International (MAR) and PepsiCo (PEP) are due to issue their results on Thursday.

Earnings in the consumer-discretionary sector of the S&P 500 are expected to be up by 17% year on year, according to Thomson.

The overseas play

The market slumped last week as concerns about the U.S. economy resurfaced after several weak economic reports, especially a worse-than-expected September jobs survey.

Now, "it all boils down to earnings," said Ed Yardeni, chief investment strategist at Yardeni Research, in written comments. "Can they recover even if employment remains weak?"

Yardeni answers in the affirmative. "U.S. companies are scrambling to decouple from the U.S. economy, and are finding more revenues and earnings overseas, especially among emerging economies," he said.

Further, "even a subpar recovery in domestic revenues could morph into significant earnings growth given all the cost cutting that has been going on during the recession," Yardeni said.

From conversations with portfolio managers, Yardeni said he found them to be leaning toward information technology as one of the best plays of the global recovery. That's especially true, he said, if that recovery is helped by rising incomes for consumers in emerging economies, who'd tend to buy more cell phones, laptops, and other electronics items.

The tech sector could provide some upbeat surprises, says Owen Fitzpatrick, head of U.S. equities at Deutsche Bank. Overall earnings in the information-technology sector are expected to be down 15% in the third quarter from the year earlier quarter.

"I expect this earnings season to be like previous quarters, with companies beating expectations," Fitzpatrick said. "But now we do want to see more visibility and some improvements in [revenue], not just the bottom line."

The weak dollar, which lost roughly 5% during the third quarter is also expected to have helped boost the overseas revenue of U.S. multinationals.