. I can tell you that my five year old is absolutely not reading - not sounding out words. I hope she isn't too much of an outlier.
My son isn't at the point of sounding out words on a page, but can tell you which word is which in a title or in a page, so he has basic phonics awareness. I would hesitate to say that he isn't "reading" yet, though. He is working on other important reading skills such as predicting, making personal connections, and retelling. It seems that we get so caught up in this idea that a child only knows to read when they can sound out words on a page that we overlook the more full nature of literacy.
http://teacher.scholastic.com/professional/readexpert/mythread.htm
Building Reading Skills
In Grades K–3:
Draw on and build children's knowledge base.
Help children understand narrative and expository text structures.
Set purposes for reading.
Make personal connections, as well as connections to other texts and issues.
Have students make and check predictions.
Discuss setting, characters, plot, outcomes, and any new information learned.
Use illustrations to teach children how to infer.
Model and teach children how to apply strategies such as predicting, questioning, retelling, and self-monitoring.
Teach new language patterns and words that are critical to the text.
Analyze new words in the text by comparing them to known words and patterns.
Use meaning, syntax, and pictures to solve word problems.
Analyze a new word by looking at and saying each letter or cluster of letters.
Reserve time for daily independent reading.