The first quarter earnings season officially gets underway next week, and BMO Nesbitt Burns says that it will be looking for signs that revenue growth is driving earnings, not just cost cuts.

In a report released on Friday, the firm says analysts expect to see 23% growth in S&P 500 earnings, year over year, down from 170% growth in the prior quarter.

“Materials and energy are expected to do most of the heavy lifting, but we should see double-digit growth almost across the board,” it says.

In the past couple of quarters, much of the earnings improvement has come from cost cutting, BMO says. Now most of that is done, so continued earnings strength “will have to come more from the top line”, it says. “Encouragingly, about 68% of S&P 500 companies beat revenue estimates in Q4.”

“The message from this coming earnings season (and over the next few quarters) will likely be one of maturation,” BMO concludes. “That is, the earnings recovery should begin to evolve from a super-charged rebound fuelled by cost cuts and margin expansion, to a more moderate growth environment driven by revenues—this evolution probably applies to equity prices, too.”

IE