By Kate Gibson

As the U.S. stock market on Monday followed the latest round of earnings, the results so far have the financial sector reporting much of the upside surprises.

With more than 12% of its companies reporting, third-quarter earnings for firms in the S&P 500 Index (SPX) have beaten forecasts by almost 38%. Yet that percentage would stand at just 8.8% without financials, according to Ed Yardeni, chief investment strategist at Yardeni Research Inc.

A similar trend could be found in looking at the 30 components on the Dow Jones Industrial Average (DJI), according to Nicholas Colas, chief market strategist at BNY ConvergEx Group.

"Overall, market expectations for revenues in the third quarter of 2009 are for a year-over-year decline of 6.1% overall and a 10.8% reduction for nonfinancial companies," said Colas.

In looking to the fourth quarter of 2009, stocks in the Dow are now expected to show a 5.3% improvement on average, with nonfinancial firms tallying a 1.3% increase, he added.

"It is no exaggeration to say that the Dow's recent rally to the 10,000 mark was in large part driven by this shift in expectations," elaborated Colas.

On Monday, energy and utilities paced the broad-market gains as stocks turned solidly higher after indecisive trading earlier on, with the major indexes finishing at their highest levels so far this year. The Dow industrials rose 96.28 points, or 1%, to 10,092.19. The S&P 500 gained 10.23 points, or 0.9%, to 1,097.91, while the Nasdaq Composite Index (RIXF) added 19.52 points, or 0.9%, to 2,176.32.

Growth ahead?

The third-quarter earnings growth rate for the S&P 500 improved to negative 22.6% from negative 24.6% last week, "due in part to better-than-expected earnings from a number of companies in the financial sector," said John Butters, director of U.S. earnings at Thomson Reuters. "The financial sector is anticipating the highest earnings growth rate for the quarter, while the energy, materials and industrial sectors are expecting the lowest."

The share-weighted earnings for financials increased to $13.1 billion from $10.6 billion during the past week, while overall share-weighted earnings for the S&P 500 increased to $137.7 billion from $134.9 billion during the same period, Butters commented.

Last week, J.P. Morgan Chase & Co. (JPM), Citigroup Inc. (C) and Goldman Sachs Group (GS) all came through with positive earnings surprises, while Bank of America Corp. (BAC) disappointed.

"Some of the regional banks reporting third-quarter results appear to have come in with negative earnings surprises, as they continue to ramp up credit losses and increase loan-loss reserves," said Fred Dickson, chief market strategist at Davidson Cos.

"After the J.P. Morgan report, investors appeared to raise the bar for the other financials, as traders who had seen only the long side of the trade working decided to 'sell the news' after Goldman Sachs and Citigroup reported, despite the fact that both companies reported better-than-expected results," said Robert Pavlik, chief market strategist at Banyan Partners.