EFTA01474964.pdf

Deutsche Bank Markets Research North America United States Periodical US Equity Insights Window for 2015 liftoff slams shut: Cut S&P 2015 end target to 2050 Any single jobs report is doubtful, but we heed this one and cut our S&P target A pivotal September jobs report. We expected a further decline in mfg jobs, but we were surprised by the sizable downshift in private jobs growth. We're skeptical of this report, but investors and especially the Fed will heed this data point. Eyes will turn to the non-mfg ISM on Monday for confirmation, but we now think the Fed is unlikely to hike in 2015. This reduces upside for stocks. It means rates, currency, commodity and PE uncertainty continues. It also means spartan interest rate conditions for Banks in 2016. The report's other concerning details included even lower workforce participation. Rates will be low in 2016, but where overnight rates will be in 2017 is now more uncertain. Will 2015 be an up year? That's now a coin toss, but still 5%+ upside from here We hate to do this as we know it seems equivocal, but we cut our 2015 S&P target despite our fundamental longer-term S&P EPS and 10yr real interest rate views (cost of equity base) still being intact. But we acknowledge that our timing on Fed hikes has been wrong and this and other uncertainties will linger longer. We stick with our 2016 end target of 2300, which assumes $125+ of S&P EPS in 2016. We make no changes to our sector strategy. But if any new strategy tweaks it would be to Borrow & Buy more Utility & Telecom stocks. 3Q S&P EPS will be weak, weakest sales/EPS growth yet of the profit recession The DB Profit Indicator is a diffusion style index based on six macro indicators. It dropped to 49.2 in July and then 46.7 in August dragged down by Mfg. ISM, Exports and Oil prices. At —47 it suggests flat to slightly down y/y 3Q EPS. Btm-up 3Q EPS is now $29.04, or -4.4% y/y on -3.4% y/y sales. EPS growth likely slows at Financials to flat ex litigation given soft capital markets conditions. Health Care EPS should be up high single-digit. Btm-up Tech EPS growth is now merely 2.8% y/y, on FX headwinds and still very sluggish corp IT spending. But final Tech EPS growth should be mid single digit on good growth at consumer exposed Tech. Btm-up 3Q EPS will fall a bit more before turning up on typical "fishhook" beats. We think 3Q EPS will finalize around $29.75, down 2% y/y, with sales down —4%, and margins up slightly. Margin improvement is on a non-GAAP basis, GAAP margins and EPS are poor. We prefer a LIFO strategy for playing a market rebound 3Q results will once again highlight a divergence between a sharp profit recession at Energy, Industrials, Materials, but decent EPS growth elsewhere. 30 won't be great for Banks ex. litigation. But Health Care, most of Consumer Discretionary and consumer exposed Tech will be good. Because of this EFTA01474964 ongoing divergence in EPS growth and also shareholder distribution coverage, we advocate a LIFO strategy, meaning that stocks last into the correction will likely be first out, as opposed to a FIFO or YTD momentum reversal strategy. Buybacks plateau, small contraction possible in 2016, but dividends will rise See our buyback funding coverage analysis inside. More reasons to stick with Healthcare, select Tech & Consumer and Banks. Industrial buybacks will fall. The future is all about firsts: Forget past cycles and precedents. This is all new We see a better chance of landing men on Mars before a full normalization of nominal and real interest rates, especially 10yr yields, to historical norms. Growth will be slow, but we do expect S&P EPS growth next year and likely through 2018. We doubt 10yr Tsy yields exceed 3% for the rest of this cycle. This supports an 18 or higher trailing S&P PE provided up EPS in year ahead. Deutsche Bank Securities Inc. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Date 2 October 2015 David Bianco Strate ist Winnie Nip Strate ist S&P 500 Key Forecasts Price Next 5%+ move Ju Wang Up 2014 Year-end Target 2058.90 EPS Target P/E Current P/E DPS 17.4x 16.5x EFTA01474965 $38.75 Related recent research Debt ceiling showdowns: A new twist to the election cycle? Fed delays: Less S&P upside for 2015 Stocks will leave hike decision to Fed but dollar likely climbs either way First back to school assignment: Stress test 2016 S&P EPS estimates US Equity Strategy Baskets High Foreign Cash (Repatriation Beneficiaries) Big-Cap Reasonable PE Tech Challenged Industrial Capital Goods US Domestic Strength 2015E 2050 $118 $119.50 17.2x 16.3x $42 2016E 2300 $128 18.0x 15.2x $45 Date 28 Sep 2015 18 Sep 2015 11 Sep 2015 4 Sep 2015 Bloomberg Ticker DBUSHIFC DBUSBRTE DBUSCICG DBUSDMST EFTA01474966 2 October 2015 US Equity Insights 3Q S&P EPS will be weak, weakest sales/EPS growth yet of the profit recession The DB Profit Indicator is a diffusion style index based on six macro indicators. It dropped to 49.2 in July and then 46.7 in August dragged down by Mfg. ISM, Exports and Oil prices. At —47 it suggests flat to slightly down y/y 3Q EPS. Btm-up 3Q EPS is now $29.04, or -4.4% y/y on -3.4% y/y sales. EPS growth likely slows at Financials to flat ex litigation given soft capital markets conditions. Health Care EPS should be up high single-digit. Btm-up Tech EPS growth is now merely 2.8% y/y, on FX headwinds and still very sluggish corp IT spending. But final Tech EPS growth should be mid single digit on good growth at consumer exposed Tech. Btm-up 3Q EPS will fall a bit more before turning up on typical "fishhook" beats. We think 3Q EPS will finalize around $29.75, down 2% y/y, with sales down —4%, and margins up slightly. Margin improvement is on a non-GAAP basis, GAAP margins and EPS are poor. Figure 1: Fishhooks: S&P 500 quarterly btm-up EPS revisions 22 23 24 25 26 27 28 29 30 31 32 33 4014 S&P 500 quarterly btm-up EPS revisions 3Q14 4Q13 3Q13 4Q12 4011 3011 2011 2Q12 3Q12 1012 1013 2Q13 1Q14 2014 2015 3015 4015 1015 EFTA01474967 22 23 24 25 26 27 28 29 30 31 32 33 Figure 2: Change in quarterly EPS before and during reporting (1Q11 — now) -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% Avg (1Q11-1Q15): 3.3% Avg: -3.9% EPS beat during reporting EPS cut prior to reporting Source: IBES, Deutsche Bank Source: IBES, Deutsche Bank Figure 3: Change in btm-up 3015 EPS since 6/30/2015 (current 3Q EPS is blended: actual for reported and consensus for the rest) -16% -11% -6% -1% 4% 3.5% Figure 4: Change in btm-up 2015 EPS since 6/30/2015 -3.6% -3.2% -3.7% -3.0% -3.9% -6.0% -1.9% -1.9% -4.2% -1.1% -6.0% -3.2% EFTA01474968 -2.6% -14.2% -13.0% -10% -8% -6% -4% -2% 0% 2% 4% Change in btm-up 2015 EPS since 6/30/2015 0.2% -1.0%-1.1% -0.6%-0.9% -2.1% -0.6% -1.1% -0.7% 2.5% 0.8% -1.6% -1.2% -3.9% -0.8% -8.2% Source: IBES, Deutsche Bank Source: IBES, Deutsche Bank Page 2 Deutsche Bank Securities Inc. S&P ex. Fin ex. En ex. Tech En, Fin. Ex. En, Fin Ex. En, Fin, HC Disc. Staples Energy Financials Health Care Industrials Tech Materials Telecom Utilities Jan-11 Apr-11 Jul-11 Oct-11 EFTA01474969 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 S&P ex. Fin ex. En ex. Tech En, Fin. Ex. En, Fin Ex. En, Fin, HC Disc. Staples Energy Financials Health Care Industrials Tech Materials Telecom Utilities 1011 2011 3Q11 4011 1012 2012 3012 4012 1013 2013 3013 4Q13 1Q14 2014 3Q14 4014 1015 2015 EFTA01474970 3Q15 EFTA01474971 2 October 2015 US Equity Insights 3Q results will once again highlight a divergence between a sharp profit recession at Energy, Industrials, Materials, but decent EPS growth elsewhere. 3Q won't be great for Banks ex. litigation. But Health Care, most of Consumer Discretionary and consumer exposed Tech will be good. Because of this ongoing divergence in EPS growth and also shareholder distribution coverage, we advocate a LIFO strategy, meaning that stocks last into the correction will likely be first out, as opposed to a FIFO or YTD momentum reversal strategy. Figure 5: S&P 500 quarterly EPS & Sales growth and Net Margins by sector (3015 is blended with actual for reported and consensus for the rest) 2011 EPS growth (y/y) S&P 500 S&P 500 ex. Financials S&P 500 ex. Energy S&P 500 ex. Tech S&P ex. Energy & Financials S&P ex. Energy, Financials, Healthcare Consumer Discretionary Multiline & Specialty Retail Cons. Disc. ex. Auto & Home Builders Consumer Staples Energy Energy Equipment & Services Oil, Gas & Consumable Fuels Financials Financials ex. BAC, C & 3PM Health Care Industrials Industrials ex. Defense Information Technology Tech ex. AAPL & GOOG Materials Telecommunication Services Utilities 1011 2011 19.2% 8.0% 9.9% 15.2% 16.7% 7.6% 36.6% -3.6% 42.6% 6.3% 10.8% EFTA01474972 10.6% 38.7% 45.3% 23.9% 17.1% 56.5% -6.0% -5.5% 19.4% 21.9% 11.3% 41.6% 19.0% 44.5% -23.9% 3.5% 8.6% 16.2% 17.1% 23.3% 11.8% 60.3% -3.8% 8.5% 3Q11 18.4% 12.3% 17.5% 21.1% 15.9% 17.1% 18.4% 20.4% 19.8% 11.9% 19.0% 13.1% 13.2% 18.1% 15.7% 13.1% 8.5% 20.7% 18.6% 19.9% 10.3% 62.7% 26.8% 68.3% 6.6% 0.9% 12.5% 17.5% EFTA01474973 19.0% 11.5% 5.2% 23.6% 3.7% 1.4% 2011 Sales growth (y/y) S&P 500 S&P 500 ex. Financials S&P 500 ex. Energy S&P 500 ex. Tech S&P ex. Energy & Financials S&P ex. Energy, Financials, Healthcare Consumer Discretionary Multiline & Specialty Retail Cons. Disc. ex. Auto & Home Builders Consumer Staples Energy Energy Equipment & Services Oil, Gas & Consumable Fuels Financials Financials ex. BAC, C & 3PM Health Care Industrials Industrials ex. Defense Information Technology Tech ex. AAPL & GOOG Materials Telecommunication Services Utilities 1011 2011 15.1% 9.2% 10.8% 10.2% 3.8% 11.0% 8.1% 24.7% 30.8% 24.2% -1.4% 3.9% 5.3% 12.6% 15.5% 14.7% 8.9% 29.1% EFTA01474974 2.5% -2.7% 12.7% 11.1% 12.0% 9.7% 5.1% 10.4% 10.2% 34.8% 34.4% 34.8% 0.0% 6.6% 6.9% 10.2% 12.8% 14.9% 8.3% 33.6% 7.8% 8.3% 2011 Net margins S&P 500 S&P 500 ex. Financials S&P 500 ex. Energy S&P 500 ex. Tech S&P ex. Energy & Financials S&P ex. Energy, Financials, Healthcare Consumer Discretionary Multiline & Specialty Retail Cons. Disc. ex. Auto & Home Builders Consumer Staples Energy Energy Equipment & Services Oil, Gas & Consumable Fuels Financials Financials ex. BAC, C & 3PM Health Care Industrials Industrials ex. Defense Information Technology Tech ex. AAPL & GOOG Materials Telecommunication Services Utilities Source: IBES, Deutsche Bank 1011 9.7% 9.3% EFTA01474975 9.9% 8.6% 9.4% 9.2% 6.5% 4.9% 6.6% 6.4% 8.6% 11.7% 7.8% 12.2% 11.7% 10.7% 6.9% 7.0% 19.1% 18.0% 10.1% 8.1% 9.0% 2011 9.5% 9.6% 9.6% 8.5% 9.7% 9.6% 7.1% 5.6% 7.3% 7.1% 8.9% 11.6% 8.0% 8.7% 10.9% 10.3% 8.0% 8.1% 18.7% 17.2% 10.0% 8.5% 9.9% 3011 9.8% 9.6% 10.0% 8.9% 9.7% EFTA01474976 9.5% 6.7% 4.6% 7.2% 6.9% 9.1% 11.8% 8.4% 11.4% 10.E 10.5% 8.2% 8.4% 18.7% 17.4% 8.1% 8.2% 12.2% 4011 9.3% 9.0% 9.7% 8.0% 9.3% 9.3% 6.2% 6.0% 7.3% 6.5% 7.5% 11.9% 8.2% 11.5% 12.0% 9.7% 8.1% 8.2% 20.E 18.6% 6.2% 6.2% 7.6% 1012 9.8% 9.2% 10.E 8.7% 9.5% 9.4% 6.3% 5.2% EFTA01474977 6.7% 6.2% 7.9% 12.0% 8.0% 13.8% 14.0% 10.3% 7.6% 7.7% 19.8% 17.3% 9.3% 8.5% 9.0% 3011 10.2% 12.9% 12.1% 12.3% 7.8% 9.8% 9.8% 13.7% 9.1% 12.3% 10.5% 10.9% 11.5% 4.8% 12.3% 12.8% 29.7% 26.6% 30.0% 2.0% 1.9% 8.1% 11.1% 13.6% 10.2% 6.2% 16.5% 6.0% 2.8% 4011 8.9% 10.4% 7.1% 8.6% 8.6% 9.2% 8.9% EFTA01474978 5.2% 10.1% 9.9% 19.3% 26.3% 18.7% -0.9% 0.3% 5.4% 8.3% 7.9% 11.7% 2.7% 6.0% 10.2% 6.3% 1Q12 6.7% 7.3% 6.2% 6.2% 6.9% 7.1% 7.1% 6.1% 8.7% 8.3% 9.1% 25.7% 7.7% 2.7% 5.1% 5.6% 6.6% 7.6% 10.8% 4.0% 4.6% 8.0% -3.3% 4Q11 9.9% 11.6% 9.4% 7.5% 11.3% 11.3% 13.5% 14.9% 17.4% 6.4% EFTA01474979 13.2% 26.1% 11.2% 0.9% 0.6% 11.2% 18.6% 19.5% 18.5% 3.6% -16.9% -19.2% -1.3% 1012 10.5% 9.3% 11.8% 8.8% 10.7% 12.0% 11.3% 20.5% 18.9% 7.6% 2.7% 30.9% -0.3% 16.0% 25.1% 5.4% 19.3% 19.8% 17.5% 3.7% -3.0% 9.9% -6.8% 2012 2012 12.7% 8.2% 5.9% 5.5% -0.1% 9.3% 8.5% 3.8% 3012 -0.2% 6.1% 3.2% EFTA01474980 2.4% 2.4% 8.1% 4Q12 8.3% 3.3% 7.3% 2.2% 5.9% 6.4% 8.8% 4.5% 5.0% 13.7% 10.1% 13.2% 11.3% 11.1% 1.4% 9.9% -14.3% -11.9% 13.3% 15.7% 8.6% -4.9% -17.7% -14.5% 16.5% 54.9% 23.3% 15.4% 16.8% 42.5% 13.3% 7.8% 16.8% 18.2% 8.7% 5.8% 2.2% 5.6% 6.2% 3.5% 0.5% -7.9% 1.9% -3.9% -2.9% 2.4% 2.7% -13.2% -21.9% 13.8% 13.2% 12.9% -8.5% 3.7% 9.0% 2012 2Q12 3Q12 1.2% 2.7% 1.0% 2.8% EFTA01474981 2.3% 4Q12 2.2% 1.3% 5.2% 2.1% 3.9% 1.7% 4.0% 3.2% 3.5% 6.6% 5.0% 4.6% 3.9% 1.6% 1.7% 3.5% 4.1% -5.9% 2.6% 2.7% 3.4% 3.8% -5.4% -6.9% 2.3% 8.6% 5.3% 1.5% 2.1% 4.6% -0.5% -5.9% 2.3% 0.8% 3.9% 3.4% 3.7% 3.4% -1.6% 17.5% 11.3% 16.5% -7.9% 3.2% 3.3% 8.1% 5.1% 6.0% 6.7% 3.1% -2.6% 2.7% -2.4% EFTA01474982 2012 2Q12 3Q12 9.3% 8.9% 9.5% 9.4% 10.2% 10.2% 8.9% 9.7% 9.6% 6.8% 5.7% 7.3% 6.9% 7.9% 6.9% 4.7% 7.5% 6.6% 8.3% 7.5% 4Q12 9.8% 9.9% 9.4% 9.4% 9.1% 9.6% 8.2% 9.2% 9.3% 6.6% 6.3% 7.6% 6.8% 8.4% 12.0% 12.0% 11.4% 7.7% 7.8% 13.0% 13.6% 11.3% 12.3% 13.4% 10.9% 10.0% 10.0% 8.7% 8.9% 8.4% 8.6% 6.7% 8.9% 9.1% 7.5% 7.7% 18.6% 18.2% 19.6% EFTA01474983 17.0% 17.1% 18.1% 8.8% 9.3% 9.6% 12.0% 6.9% 6.1% 8.5% 1013 10.0% 9.3% 10.3% 9.0% 9.4% 9.3% 6.3% 5.3% 7.0% 6.4% 8.5% 11.2% 7.9% 15.0% 14.7% 9.8% 7.9% 8.0% 18.7% 17.4% 9.3% 8.9% 9.3% -3.4% 17.8% 23.6% 8.5% 1.9% 2.7% 7.0% 3.1% 3.8% 2.1% 5.1% 1013 1.7% 1.4% 3.4% 1.4% 3.3% 2.6% 3.8% EFTA01474984 1.8% 3.6% 2.6% -7.1% 4.7% -8.3% 3.7% 4.3% 7.1% 0.3% 0.7% 4.3% 1.6% 0.3% 0.6% 5.6% 1Q13 5.1% 3.1% 5.5% 6.4% 3.2% 3.3% 8.1% 8.8% 11.6% 3.5% 2.3% -1.9% 2.9% 14.0% 11.3% 2.7% 5.7% 5.4% 0.0% 5.0% 0.1% 10.4% 1.9% 2013 2Q13 3Q13 7.2% 7.7% 5.0% 4Q13 7.5% 13.3% 10.2% 6.0% EFTA01474985 -7.4% -0.9% 8.8% 8.8% 8.6% 9.2% 7.1% -6.3% 5.1% 4.2% -8.5% 24.7% 9.7% 1Q14 10.0% 10.6% 10.2% 10.8% 6.5% 5.9% 4.5% 7.7% 7.0% 2Q14 13.5% 8.2% 7.7% 12.7% 11.5% 7.6% 7.7% 7.4% 2014 3Q14 9.5% 4Q14 9.1% 3.4% 1Q15 -0.3% 14.4% 12.9% 15.7% 0.0% 1.0% 9.7% 7.7% 9.3% 10.8% 10.6% 11.1% 10.9% 9.3% 8.0% -1.5% EFTA01474986 6.5% 2015 2Q15 6.3% 5.8% 10.4% 5.2% 9.3% 10.8% 6.7% 2.8% 1.7% 1.3% 8.3% 8.3% 3.0% 2.4% 14.3% 21.6% 17.3% 13.8% 17.1% 13.5% 2.4% -7.6% 1.0% 7.3% 0.6% 14.4% 11.0% 10.3% 14.6% 4.0% 0.0% -9.1% -10.4% -12.2% -2.4% 30.6% 27.4% 11.1% 22.1% 5.8% 2.3% 1.8% -2.2% 2.7% -3.4% 5.4% -2.8% 2013 2Q13 3Q13 4.2% 3.9% 3.6% 4.6% 3.6% 4Q13 3.6% 2.8% 1.8% 4.5% 3.7% 1Q14 3.8% 3.8% 3.2% 4.5% 3.6% EFTA01474987 2Q14 5.2% 5.3% 4.5% 5.8% 4.6% 20.5% 22.0% 10.9% 11.9% 12.8% 9.0% 8.9% 2.1% 17.5% 9.7% -0.1% 7.3% 17.0% 11.6% 7.7% 0.9% -1.7% 9.4% 0.3% 7.4% 6.0% 12.3% 11.4% 22.6% 17.2% 11.2% 6.2% 4.0% 3Q15 -4.4% -7.0% 3.2% -6.0% 2.1% 1.2% 9.9% 12.0% 5.3% -2.3% 18.6% 10.9% -24.3% -57.6% -56.1% -64.5% 10.7% 16.5% 15.8% 20.9% 16.7% 22.2% -22.3% -44.9% -60.0% 18.2% -6.5% 6.7% -33.5% -63.7% -58.3% -65.5% -3.4% 3.9% 16.2% 17.3% 7.1% EFTA01474988 1.9% 10.9% 18.2% 15.8% 22.5% 18.4% 13.3% 3.0% 1.2% 8.1% 6.1% -1.2% 14.6% 14.9% 14.0% 10.3% 15.6% 15.7% 12.7% 11.8% 17.0% 10.5% 18.2% 10.4% 15.5% 7.8% 23.6% 15.7% -4.9% 22.4% 10.4% 20.0% 4.0% 0.4% 3.6% 1.8% 2014 3Q14 4.1% 5.8% 3.9% 5.7% 4.4% 4Q14 1.7% 4.7% 0.5% 5.8% 4.1% 1Q15 -4.2% 2.2% -4.3% 2.0% 0.5% 0.8% 4.0% 1.8% 1.8% 9.1% 3.4% 7.3% 9.4% 2.5% 2.1% 0.8% 2.4% EFTA01474989 -0.1% -1.0% 7.9% -0.2% 8.2% 9.7% 4.2% 2015 2Q15 -4.4% 1.1% -4.5% 1.2% -0.4% 2.1% 3.9% 2.6% 0.6% 7.4% -1.0% 6.2% -3.6% -3.7% 2.8% -4.9% -15.1% 11.4% -2.3% 3Q15 2.9% 3.7% 2.2% 3.3% 4.9% 4.3% 1.4% -3.2% -3.7% -3.4% 2.6% 3.8% 3.0% 3.7% 3.3% -4.4% 2.4% -3.9% 2.1% 0.8% 6.7% 5.1% 5.6% 2.8% -2.2% 9.3% -3.4% 4.4% 3.3% 5.6% 1.0% EFTA01474990 1.4% 1.5% 0.8% 2.0% 2.2% 8.8% 2013 2013 3013 9.5% 9.0% 9.9% 9.9% 4013 9.3% 8.7% 9.6% 9.8% 1014 9.4% 9.0% 9.6% 9.5% 2014 9.7% 9.4% 5.9% 4.4% 5.0% 2.5% 2.3% 8.9% 1.6% 0.3% -0.9% 9.2% 1.6% 2.2% 4.2% 4.1% 6.1% 2.6% 2.5% 4.0% 1.3% 3.9% 3.3% -0.8% -0.4% -0.8% -6.1% EFTA01474991 -8.0% 8.8% 2.5% 3.5% 5.5% 4.8% 3.5% 2.1% 2.7% 4.5% 3.2% 5.3% 1.4% 0.6% 7.2% -0.2% -0.1% 1.0% 8.9% 1.6% 2.3% 3.7% 3.1% 1.5% 3.7% 16.8% 4.7% 5.8% 5.9% 3.3% 2.3% 3.2% 2.2% 2.5% 4.3% 4.1% 5.1% 5.3% 2.8% 3.7% 5.5% 4.6% 1.4% 5.0% 4.2% 5.3% 3.9% 1.5% -3.5% -18.0% -34.8% -31.7% -36.9% 7.0% -10.3% -24.8% -32.8% EFTA01474992 -4.7% -20.9% -37.8% -32.5% -37.4% 6.2% 6.7% -1.1% -0.2% 11.8% 11.7% 13.6% 3.7% 4.6% 8.5% 8.6% 3.2% 3.1% 3.1% 4.5% 5.3% 7.9% 6.9% 2.4% 3.0% 4.7% 2014 3Q14 9.8% 9.5% 4Q14 9.8% 8.9% 1Q15 9.6% 9.4% 3.9% 3.9% 8.2% 2.5% -1.7% 5.2% 9.1% 3.0% 4.0% 9.1% -2.3% -2.4% 5.5% 0.2% -9.2% 2.5% -2.5% 0.7% 0.9% 8.1% -3.5% EFTA01474993 -4.1% 2.5% -3.3% -9.5% 2.4% -4.6% 2015 2Q15 9.9% 9.8% 10.6% 10.4% 10.4% 10.4% 10.7% 10.8% 10.8% 11.1% 11.4% 9.2% 9.6% 9.5% 10.0% 10.1% 10.2% 10.2% 10.5% 10.0% 10.2% 10.4% 10.0% 10.4% 7.1% 6.0% 7.8% 6.9% 7.3% 7.8% 4.9% 7.9% 6.9% 7.3% 7.5% 6.6% 5.6% 7.4% 6.9% 7.6% 7.2% 6.4% 4.9% 7.4% 6.4% 8.3% 7.2% 7.1% 5.8% 7.9% 7.1% 8.3% 7.4% 7.1% 5.0% 8.0% 7.0% 8.2% 7.6% EFTA01474994 7.2% 6.2% 7.9% 6.7% 6.9% 7.3% 6.7% 5.3% 7.4% 6.5% 5.4% 6.7% 7.5% 6.0% 8.0% 7.0% 5.2% 11.0% 11.0% 11.4% 11.6% 12.0% 12.2% 12.6% 12.3% 11.6% 7.8% 5.9% 16.1% 13.5% 15.0% 15.0% 14.6% 14.7% 14.4% 16.6% 16.7% 15.0% 14.9% 14.5% 15.6% 15.2% 15.4% 14.9% 15.7% 15.1% 9.9% 8.8% 8.9% 9.8% 9.0% 9.2% 7.1% 9.0% 9.0% 8.7% 8.9% 12.1% 7.9% 7.1% 7.9% 9.9% 7.9% 7.8% 9.0% 10.3% 10.1% 9.7% 9.9% 9.8% 10.0% 8.9% 8.9% 8.2% 9.7% 9.5% EFTA01474995 9.7% 10.2% 10.5% 10.4% 9.9% 11.9% 8.0% 8.3% 8.0% 10.8% 11.0% 8.7% 8.7% 9.7% 9.9% 17.7% 18.7% 20.2% 19.0% 18.5% 18.6% 21.2% 19.3% 18.9% 17.0% 18.1% 19.2% 17.7% 17.7% 17.8% 19.8% 17.6% 17.7% 8.5% 9.1% 9.0% 9.7% 10.4% 11.0% 11.1% 10.4% 9.7% 4.1% 6.2% 7.9% -5.4% -6.1% 1.4% -3.9% -8.9% 15.0% 3.1% 3Q15 10.1% 10.0% 10.0% 10.1% 10.4% 10.5% 10.4% 10.6% 10.8% 10.5% 9.2% 9.6% 11.1% 9.4% 10.2% 10.3% 7.8% 5.3% 8.4% 6.6% 4.5% 7.7% 4.1% 16.5% 15.7% 9.9% 10.1% EFTA01474996 10.3% 18.9% 17.5% 7.6% 10.0% 11.3% Deutsche Bank Securities Inc. Page 3 EFTA01474997 2 October 2015 US Equity Insights Figure 6: % of S&P Reported by Week 0% 5% 10% 15% 20% 25% 30% 35% S&P 500 EPS (earnings weight) to be reported each week 31.8% 25.3% 18.6% 12.9% 3.3% 1.1% 2.1% 3.3% 1.6% Source: IBES, Deutsche Bank Figure 7: Summary stats for firms with August-quarter end that have reported results (AA has September-quarter end) 3Q15 EPS Ticker Company Name FDX-US FedEx Corp ORCL-US Oracle Corp LEN-US Lennar Corp AZO-US Autozone Inc KMX-US Carmax Inc CCL-US Carnival Corp GIS-US General Mills Inc ACN-US Accenture PLC CTAS-US Cintas Corp Sector Industrials Information Technology ADBE-US Adobe Systems Inc Information Technology RHT-US Red Hat Inc Information Technology Industry Air Freight & Logistics Software Software Software Consumer Discretionary Household Durables Consumer Discretionary Consumer Discretionary Specialty Retail Specialty Retail EFTA01474998 Consumer Discretionary Hotels, Restaurants & Leisure DRI-US Darden Restaurants IncConsumer Discretionary Hotels, Restaurants & Leisure CAG-US ConAgra Foods Inc Consumer Staples Consumer Staples Food Products Food Products BBBY-US Bed Bath & Beyond IncConsumer Discretionary NKE-US Nike Inc Consumer Discretionary Information Technology Industrials COST-US Costco Wholesale CorpConsumer Staples PAYX-US Paychex Inc Information Technology MU-US Micron Technology IncInformation Technology MKC-US McCormick & Company IncConsumer Staples Weighted Average Source: IBES, Deutsche Bank MU and ORCL management guidance and color suggest that corporate IT spending remains very sluggish Specialty Retail Textiles, Apparel & Luxury Goods IT Services Commercial Services & Supplies Food & Staples Retailing IT Services Reporting Date 9/16/2015 9/16/2015 9/17/2015 9/21/2015 9/21/2015 9/22/2015 9/22/2015 9/22/2015 9/22/2015 9/22/2015 9/22/2015 9/24/2015 9/24/2015 9/24/2015 9/24/2015 9/29/2015 9/30/2015 Semiconductors & Semiconductor Equipment10/1/2015 Food Products 10/1/2015 Surprise (%) EFTA01474999 Y/Y 3Q15 Sales Surprise (%) Y/Y 3Q15 Est. Change (since 9/1/2015) EPS Sales -1.3% 15.2% -0.5% 5.1% 0.2% -0.3% 1.7% -14.5% -1.0% -1.7% 0.3% -0.1% 8.4% 92.9% 0.2% 21.1% -0.2% -0.1% 6.6% 14.6% 1.9% 13.1% 0.2% 0.0% 20.4% 23.1% 2.9% 23.7% -0.4% -0.4% 0.4% 13.0% 1.0% 7.9% -0.1% -0.1% 7.0% 28.1% -2.6% 7.9% -0.7% -0.7% 7.5% 10.8% 1.4% -1.3% 0.0% 0.1% 20.1% 112.5% 0.8% 5.7% 1.6% 0.0% 13.5% 15.4% -24.1% -24.5% 0.2% -0.2% 14.5% 29.5% -1.0% -1.4% 0.1% 0.0% 0.0% 3.4% -1.1% 1.7% 0.0% 0.0% 13.0% 22.9% 2.4% 5.4% 0.4% 0.1% 2.9% 6.5% 2.9% 1.4% 0.1% 0.1% 2.9% 19.2% 2.4% 8.8% 0.1% 0.0% 4.2% 9.5% -2.0% 0.7% 0.0% -0.8% 2.0% 10.6% 0.8% 8.4% 0.0% 0.0% 2.7% -54.9% 0.1% -14.8% -9.4% -1.1% -1.8% -10.5% 0.3% 1.6% 0.2% 0.0% 5.1% 1.3% -1.2% 1.0% -0.9% -0.1% Page 4 Deutsche Bank Securities Inc. Pre-season W1 (10/5-10/9) # 19 #5 W2 (10/12-10/16) #37 W3 (10/19-10/23) W4 (10/26-10/30) W5 (11/2-11/6) W6 (11/9-11/13) W7(11/16-11/20) After 11/23 #118 #174 #93 #15 #25 #14 EFTA01475000 2 October 2015 US Equity Insights Figure 8: Oil and USD since 2012 2012 avg. WTI Oil ($/bbl) Brent Oil Natural Gas Trade-weighted broad index (1/97 = 100) Trade-weighted major currency (3/73=100) EUR/USD GBP/USD USD/JPY Trade-weighted OITP (1/97=100) Source: EIA, WSJ, FRB, Deutsche Bank 94.3 111.8 2.74 73.50 1.29 1.58 79.79 2013 avg. 97.9 108.6 3.72 75.95 1.33 1.56 2014 avg. 93.70 99.62 4.30 78.34 1.33 1.65 1Q14 avg. 98.6 108.4 4.88 76.88 1.37 1.65 2Q14 avg. 103.1 109.4 4.58 EFTA01475001 76.38 1.37 1.68 3Q14 avg. 98.2 102.5 3.95 77.66 1.33 1.67 4Q14 avg. 74.88 78.24 3.79 82.44 1.25 1.59 1Q15 Y/Y avg. % chg 2Q15 Y/Y avg. % chg 3Q15 Y/Y q/q avg. % chg % chg 48.9 -50.4% 57.4 -44.4% 47.4 -51.8% -17.4% 53.7 -50.5% 61.2 -44.0% 50.6 -50.6% -17.3% 2.88 -40.9% 2.75 -40.1% 2.74 -30.6% -0.1% 99.85 101.02 104 07 102.88 102.40 103.12 107.87 114.20 11.0% 114.85 12.2% 118.74 15.2% 3.4% 89.12 15.9% 90.01 17.8% 91.67 18.0% 1.8% 1.13 -17.4% 1.11 -19.4% 1.11 -16.3% 0.6% -8.3% 1.53 1.52 128.32 127.77 131.52 130.73 130.31 130.28 134.77 140.47 -9.1% 1.55 -7.2% 1.4% 97.50 105.71 102.87 102.13 103.77 114.09 119.18 15.9% 121.33 18.8% 122.27 17.8% 0.8% 7.5% 140.82 8.1% 147.25 13.0% 4.6% Figure 9: DB Profit Indicator dropped sharply in 3Q to 46.7, back to Feb/- March levels; it has exceeded 50 since Feb '14 2Q15 DB Profit Indicator (qtrly avg.) DB Profit Indicator (monthly) Mfg. ISM EFTA01475002 ISM New Orders Index ISM Production Index Industrial Production (seq. 3mo % chg, a.r.) Capacity Utilization (%) Exports (seq. 3mo % chg, a.r.) Capital Goods exports (seq. 3mo % chg, a.r.) Mfg ISM Export Orders Index - 3mo avg. Initial claims (month avg., 000's) Unemployment Rate (%) Change in non-farm payroll (000's) Loan growth (seq. 3mo % chg, a.r.)** C&I loan growth (seq. 3mo % chg, a.r.) CRE loan growth (seq. 3mo % chg, a.r.) 52.5 Aug 46.7 Aug-15 Aug-15 Aug-15 Aug-15 Aug-15 Aug-15 Aug-15 Aug-15 Aug-15 Aug-15 Aug-15 Home Equity & Other Residential loan growth (seq. 3mo % chg, a.r.) Consumer loan growth (seq. 3mo % chg, a.r.) Other loan growth (seq. 3mo % chg, a.r.) Aug-15 Aug-15 Aug-15 Aug-15 Aug-15 Aug-15 Oil price (% chg from prior quarter avg. price) WTI spot month end, $/bbl Brent spot month end, $/bbl Source: Deutsche Bank, ISM, Federal Reserve, Census, DOL, BLS, EIA, WSJ, CME Aug-15 Aug-15 Aug-15 1Q15 47.9 Jul 49.2 Current Month 51.1 51.7 EFTA01475003 53.6 0.5% 77.6 -4.6% -7.1% 48.0 274 5.1 173 6.6% 9.3% 8.8% 1.0% 5.5% 9.7% 4Q14 51.1 Jun 53.3 Prior Month 52.7 56.5 56.0 -1.1% 78.0 Chg. -1.6 -4.8 -2.4 1.6% -0.4 1.1% -5.7% -3.9% -3.1% 49.2 275 5.3 245 -1.2 -1 -0.2 -72 6.8% -0.1% 10.2% -0.9% 8.2% 1.2% -0.2% 5.1% 10.2% -0.5% -22.6% -19.5% 45.29 41.86 EFTA01475004 47.11 -1.82 54.30 -12.44 0.6% 0.4% Prior 3mo avg. 53.0 56.1 54.8 -2.1% 77.6 -1.2% 0.2% 49.7 274 5.4 250 7.3% 10.9% 8.1% 1.5% 4.5% 12.7% 55.59 58.75 Prior 6mo avg. 54.7 -1.1% Neutral 77.9 -11.2% Negative -6.0% 49.5 283 Positive 5.4 220 7.7% Neutral 11.6% 7.9% 1.3% 3.7% 16.1% Negative 53.57 58.82 Current Signal 52.5 Negative 54.4 Tactical Signal EFTA01475005 Negative Figure 10: Federal Reserve Surveys still read negatively, but capex outlook has somewhat improved Federal Reserve Manufacturing Surveys Prior Current Outlook Index Empire State Mfg Survey (NY) Philly Fed Business Outlook Survey Texas Mfg Outlook Survey (Dallas) Richmond Mfg Survey Kansas City Fed Mfg Survey Future 6mo Capital Expenditures Index Empire State Mfg Survey (NY) Philly Fed Business Outlook Survey Richmond Mfg Survey Kansas City Fed Mfg Survey Sep-15 3mo avg -4.3 -14.7 -6.0 -9.5 -5.0 -8.0 11.3 27.2 33.0 -1.0 9.7 -9.1 6.7 -8.3 16.7 11.4 28.7 4.0 Level: % of firms reporting increase less % of firm reporting decrease Source: Federal Reserve, Deutsche Bank Global Euro Area Germany France Italy Spain UK Australia Canada Japan China India Brazil Russia EFTA01475006 US ISM Chicago ISM Milwaukee Figure 11: Global Mfg PMI (Red = <50 and lower than last month and prior 3 months) Global Manufacturing PMI m/m Sep-15 50.6 52.1 52.3 50.6 52.7 51.7 51.5 52.1 48.6 51.0 49.8 51.2 47.0 49.1 50.2 48.7 39.4 -0.3 -1.0 2.3 -1.1 -1.6 -0.1 0.4 -0.8 -0.7 0.1 -1.1 1.2 1.2 -0.9 -5.7 -8.2 Prior chg. 3mo avg. -0.1 50.9 52.4 52.3 49.5 54.4 53.8 51.7 EFTA01475007 48.7 50.5 51.0 50.0 52.1 46.5 48.3 52.4 50.1 47.1 Chg. -0.3 -0.4 0.0 1.1 -1.7 -2.1 -0.2 3.4 -1.9 0.0 -0.2 -0.9 0.5 0.78 -2.2 -1.4 -7.7 Source: Markit, JP Morgan, Comp des Dirigeants et Acheteurs France, Associazione Ital Acquisti e Supply Mgmt, CIPS, Australian Industry Group-PricewaterhouseCoopers, Royal Bank of Canada, Nikkei, China Federation of Logistics & Purchasing, HSBC, ISM, Deutsche Borse, Marquette Univ. Center for Supply Chain Mgmt, Creighton University College of Business, Deutsche Bank Deutsche Bank Securities Inc. Page 5 EFTA01475008 2 October 2015 US Equity Insights Any single jobs report is doubtful, but we heed this one and cut our S&P target A pivotal September jobs report We expected a further decline in mfg jobs, but we're very surprised by the sizable downshift in private jobs growth. We're skeptical of this report, but investors and especially the Fed will heed this data point. Eyes will turn to the non-mfg ISM on Monday for confirmation, but we now think the Fed is unlikely to hike in 2015. This reduces upside for stocks (although it may also reduce downside). It means rates, currency, commodity and PE uncertainty continues. And if the Fed does hike in 2015 the typical initial adverse market reaction could be worse than usual. It also means Spartan interest rate conditions for Banks in 2016. The report's only other new data to ring true to us was lower workforce participation. Rates will be low in 2016, but where rates will be in 2017 is now more uncertain. We see a better chance of landing men on Mars before a full normalization of nominal and real interest rates, especially 10yr yields, to historical norms. Growth will be slow, but we do expect S&P EPS growth next year and likely through 2018. We doubt 10yr Tsy yields exceed 3% for the rest of this cycle. This supports an 18 or higher trailing S&P PE provided up EPS in year ahead. (On a related note, please see DB research note on Sept 30 2015 "US Aerospace/Defense - How Space Got to be Cool Again") Figure 12: Labor participation 58% 60% 62% 64% 66% 68% Recession Full-time employed (% of employed, rhs) Source: BLS, Deutsche Bank 78% 80% 82% 84% 86% 88% Participation rate (% of 16 yrs+ pop, lhs) Figure 13: Wage growth 0% 2% 4% 6% 8% 10% 0% EFTA01475009 1% 2% 3% 4% 5% Recession Fed Funds Target (lhs) Avg. hourly earnings (Production and non-supervisory, y/y, rhs) Source: BLS, Deutsche Bank Figure 14: Productivity vs Unit Labor Cost Rolling 2 yr average, y/y -2% 0% 2% 4% 6% 8% 10% 12% Recession Source: BLS, Deutsche Bank Unit labor costs (lhs) ULC y/y was 1.7% in 2Q 2015 -2% 0% 2% 4% 6% 8% 10% 12% Productivity (Output/hour, rhs) Figure 15: Fed still hasn't started hiking Rolling 2 yr average , y/y -2% 0% 2% 4% 6% 8% 10% Recession Avg. Hourly Earnings (lhs) Source: BLS, FRB, Deutsche Bank Unit labor costs (lhs) Fed Funds Rate (rhs) 0% 2% 4% 6% EFTA01475010 8% 10% 12% Page 6 Deutsche Bank Securities Inc. 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 1983 1985 1987 1989 1991 1993 1995 1997 EFTA01475011 1999 2001 2003 2005 2007 2009 2011 2013 2015 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 EFTA01475012 2 October 2015 US Equity Insights Buybacks plateau, small contraction possible in 2016, but dividends will rise 3Q buybacks announcements are significantly lower than the strong announcements in the first half of this year, but total buyback announcements are still strong at $600bn on a trailing 4-qtr basis. S&P is using up its domestic FCF for payouts and part of buybacks are funded by domestic debt issuance. For 2016, we assume 62% of profits are domestically generated with US dollar strengthening more. We also assume that capex is equal or below D&A for the US portion (as a lot of capex is Energy or foreign). $125-$128 of 2016E EPS should be —$1100bn net income. Domestic profits are 62% of that or $680bn, and domestic FCF (FCF = pro-forma earnings — capex + D&A) is around the same amount. So domestic profits or rough domestic FCF of $680bn less dividends of $390bn is $300bn (domestic surplus FCF). We think buybacks will be no higher than 450bn or contract slightly in 2016. And —$150bn net buybacks will be funded with domestic debt issuance. There are other drains on domestic surplus FCF, such as cash paid for domestic acquisitions, and also the strong possibility of mandatory pension deficit reduction contributions this year (especially at Industrials). We think working capital will not grow much and perhaps even shrink slightly, and cash taxes could be a small boost to FCF. All of the strains on maintaining buybacks (even dividends) will be at Energy, Industrials, and Materials. But we think Healthcare, most of big cap Tech, and even Banks should be in a very good position to maintain buybacks or even boost them a bit as surplus FCF at these sectors is healthy and these companies still very much have access to bank lines of credit and debt capital markets and very low borrowing rates despite slightly wider credit spreads. Figure 16: S&P 500 buybacks: announcements, gross buybacks and net buybacks (4-qtr sum) 100 200 300 400 500 600 700 -100 0 Recession Announcements Source: Compustat, Deutsche Bank Gross Buybacks S&P 500 (4qtr sum, $bn) 100 EFTA01475013 200 300 400 500 600 700 -100 0 Net Buybacks Figure 17: Buybacks % of market cap: announcements, gross buybacks, net buybacks (4-qtr sum) -1% 0% 1% 2% 3% 4% 5% 6% S&P 500 (4qtr sum % avg mkt cap) -1% 0% 1% 2% 3% 4% 5% 6% Recession Announcements Source: Compustat, Deutsche Bank Gross Buybacks Net Buybacks Deutsche Bank Securities Inc. Page 7 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 EFTA01475014 2010 2011 2012 2013 2014 2015 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 EFTA01475015 2 October 2015 US Equity Insights Figure 18: S&P 500 buybacks: announcements, gross buybacks and net buybacks (quarterly) 120 160 200 240 40 80 -80 -40 0 S&P 500 (quarterly, $bn) 120 160 200 240 40 80 -80 -40 0 Figure 19: Buybacks % of market cap: announcements, gross buybacks, net buybacks (quarterly) -4% -2% 0% 2% 4% 6% S&P 500 (quarterly % avg mkt cap, ar) -4% -2% 0% 2% 4% 6% Recession Recession Series5 Source: Compustat, Deutsche Bank Announcements Gross Buybacks Net Buybacks Source: Compustat, Deutsche Bank Announcements Gross Buybacks Net Buybacks EFTA01475016 Figure 20: S&P 500 net buybacks vs. surplus FCF 100 200 300 400 500 600 700 -100 0 Net Buybacks (4qtr sum, $bn) Source: IBES, Compustat, Deutsche Bank Surplus FCF (4qtr sum, $bn) S&P 500 Figure 21: S&P 500 ex Financials at 15.1% net debt / mkt cap 10% 20% 30% 40% 50% 60% Recession Source: Compustat, Deutsche Bank Net Debt / Mkt Cap (S&P 500 ex. Financials) 10% 20% 30% 40% 50% 60% Figure 22: S&P 500 ex Financials at $3.91tr total debt and $1.54tr cash 1,000 1,500 2,000 2,500 3,000 3,500 4,000 500 0 Recession Source: Compustat, Deutsche Bank Total Debt Cash S&P 500 ex Financials 500 1,000 1,500 2,000 EFTA01475017 2,500 3,000 3,500 4,000 0 Page 8 Deutsche Bank Securities Inc. 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 EFTA01475018 2005 2007 2009 2011 2013 2015 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1995 1996 1997 1998 EFTA01475019 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 EFTA01475020 2 October 2015 US Equity Insights Companies repurchase shares at market prices, but issue them at lower prices through employee stock option programs. Thus, cash flow statement reported net dollars spent on share repurchases as a percent of market cap overstates likely share count shrink. Just as option expense shouldn't be excluded from EPS, it should not be neglected in buyback activity measures. Buyback yield estimates should reflect the continuous issuance of stock to employees at option exercise prices that are well below the market price at which shares are repurchased. This is why we estimate buyback yield as: (net dollars spent on buybacks less option expense) / market cap. On this basis, the S&P buyback yield is 1.5%, its dividend yield is 2.0% and its total yield is 3.6% with a total payout ratio of 62% (as of the end of 2Q 2015). Figure 23: Total yield: dividend + buyback yield S&P 500 Figure 24: Total payout: dividend + buyback payout -2% -1% 0% 1% 2% 3% 4% 5% 6% Recession Dividend Yield Source: IBES, Compustat, Deutsche Bank Buyback Yield Total Yield -2% -1% 0% 1% 2% 3% 4% 5% 6% -40% -20% 0% 20% 40% 60% 80% 100% S&P 500 -40% EFTA01475021 -20% 0% 20% 40% 60% 80% 100% Recession Dividend Payout Source: IBES, Compustat, Deutsche Bank Buyback Payout Total Payout Deutsche Bank Securities Inc. Page 9 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 EFTA01475022 2012 2013 2014 EFTA01475023 US Equity Insights 2 October 2015 Page 10 Deutsche Bank Securities Inc. Strategy Flashcard Strategy Flashcard S&P 500 to reach 2300 by 2016 end on a long expansionary cycle of moderate growth 2015 end target: 2050 2014A EPS PE on yearend S&P targets DPS EPS/DPS growth Market strategy and tactics: Lower S&P returns than history likely, but still decent and few alternatives - stay involved, buy on dips Consider lesson of 2014: Interest rates stayed very low despite better growth and tighter labor market Next 5%+ move is likely: Up Thematic and sector strategy: Tilt toward: 1) Secular Growth Sectors - industries with strong sales growth in the middle of economic cycles 2) Sales Growth near 5% - industries not dependent on margin expansion to drive 5%+ EPS growth 3) High ROE or long competitive advantage - ability to defend ROE/margins amidst low interest rates 4) Dividend Growth - stocks with ability to significantly raise dividend payout ratios 5) Debt Capacity - companies that can issue cheap debt for acquisitions and share buybacks Tilt away from: 1) Consumer companies w/tired brands or facing tough competition (seek unique products/experiences) 2) Smaller cap cyclical plays which are still expensive, prefer big-cap banks and select retailers 3) Commodity and industrial capital goods producers, prefer Transports Risk of near-term correction: Moderate "S&P PE stands on the shoulders of bonds 17.4 $39 2015E $118 $119.50 17.2 $42 2016 end target: 2300 2016E $128 18.0 EFTA01475024 $45 6%/8% 1%/8% 7%/7% Quarterly EPS 1Q14A 2Q14A 3Q14A 4014A $28.00 $29.75 $30.00 $30.25 Div Yld: 2% 1Q15A 2Q15E 3Q15E 4Q15E $28.65 $30.20 — $29.75 $31.00 Reasons to still buy stocks: 1) —2.5% US GDP likely in 2015 2) S&P EPS will rise despite $/oil 3) PEs justifiable and been higher 4) Bond yields are nil after inflation Dare to ask: Why not 2500+ S&P cycle-high? 2500+ = —18x 2018E EPS of -$145 S&P 500 avg. trailing 4qtr PE: 1960-2014 1985-2014 1995-2014 2005-2014 16.0 17.6 18.6 15.9 Sectors/Industries: Health Care, Tech Health Care, Tech, Consumer Disc. Tech, Health Care, some Consumer Big Banks, Mega-cap Tech Tech, Health Care, some Consumer Staples Be selective and valuation mindful Energy, Industrial Capital Goods Risks - US tax on foreign profits, whether repatriated or not, threatens large multinationals and would cause margin contraction - EM economy weakness that causes a steep decline in commodity prices, especially oil, and threatens US exports and investment spending EFTA01475025 - A surge in long-term interest rates or any global economic shock would threaten our constructive view on the S&P for 2015 EFTA01475026 US Equity Insights 2 October 2015 Deutsche Bank Securities Inc. Page 11 Seven Signs Figure 25: The Seven Signs: cross asset class market signals Current Change vs "The Seven Signs" Cross Asset Class Market Signals Interest Rates and Inflation 10yr Treasury yield 10yr TIPS yield 10yr Treasury - TIPS spread 5yr Treasury yield 30yr Treasury yield Fed Fund Rate 2015 End (Futures) Fed Fund Rate 2016 End (Futures) Duration US Treasury yield curve slope (10-2yr) US Treasury yield curve slope (10-5yr) Credit Corporate IG credit spreads (bps) Financial Industrial Financial spreads over Industrial Corporate HY credit spreads (bps) TED spreads (bps) Muni spreads (bps) Sovereign spreads (bps) Germany France Italy Spain Currency US Dollar index USD/EUR JPY/USD CHF/USD USD/Gold (real $) Commodities CRB Brent Oil WTI Oil Natural gas Copper Uncertainty VIX 1M Implied Vol 1M Realized Vol 1M Vol Premium (Implied - Realized) Correlation (S&P 500) 1M Implied Correlation EFTA01475027 1M Realized Correlation 1M Correl Premium (Implied - Realized) LTM PE / 3m Avg. VIX (mkt emotion) Offered Equity Risk Premium LTM PE PE on 2015E EPS PE on normalized 2015E EPS Implied real return offered by S&P 500 Implied ERP offered by S&P 500 Source: FRB, Bloomberg Finance LP, I/B/E/S, Deutsche Bank 21.7 22.4 -0.7 50.2 64.1 -13.9 0.83 16.1 16.0 15.6 6.2% 5.6% Prices as of 9/30/2015 A signal's risk aversion is based on its current level expressed as a percentile of all the observations in its long-term history. Monthly observations from 1960 for Interest Rates & Inflation, Duration, LTM PE and Implied ERP; 20 yr history for the rest. 2.7 -3.2 5.9 2.8 -6.2 9.0 -0.04 -1.0% 1.0% 1.4% 20.8 28.3 -7.5 51.8 72.0 -20.2 0.91 16.3 6.1% 5.5% 3.3 12.3 -9.0 8.0 EFTA01475028 35.4 -27.4 -0.27 -4.0% 4.2% 3.1% 13.6 9.4 4.2 40.3 33.8 6.5 1.29 17.0 5.9% 5.4% 15.0 13.7 1.3 40.6 37.0 3.6 0.95 15.2 6.7% 6.2% 18.6 16.9 1.6 37.0 32.2 2.7 0.98 18.5 6.5% 3.6% 74% 82% 22% 85% 96% 4% 31% 46% 53% 83% 403.13 48.37 45.09 2.52 5176.5 EFTA01475029  -0.6% 1.3% 1.4% -1.8% 2.1% 405.66 48.39 45.47 2.64 5228.0 -0.6% 0.5% 6.3% -4.1% 2.2% 473.42 94.67 91.16 4.12 6720.0 482.61 98.14 87.21 3.57 7478.2 346.53 56.26 54.41 4.48 4518.8 64% 48% 47% 21% 57% 92.10 1.1177 119.88 0.9733 469.9 1.5% -0.1% -0.3% -0.7% -1.4% 91.66 1.1234 120.11 0.9730 473.0 -0.3% EFTA01475030 0.4% -2.0% 0.6% 0.0% 81.09 1.2631 109.65 0.9551 509.9 76.95 1.3012 95.05 0.9251 618.7 86.53 1.2203 108.08 1.2367 348.9 67% 28% 79% 23% 70% 160.4 184.4 -24.0 670.0 34.5 41.32 -145.1 -105.3 -31.4 -14.8 8.4 12.6 -4.2 47.1 2.5 8.7 10.3 12.2 9.8 3.7 153.0 173.2 -20.2 610.2 32.1 34.4 -149.9 EFTA01475031 -110.7 -34.4 -13.0 1.6 2.7 -1.1 15.7 5.1 0.1 -2.2 2.9 -6.2 -0.1 121.9 116.8 5.1 462.1 22.0 -1.3 -154.3 -120.6 -15.7 -35.3 184.6 140.9 43.7 526.4 25.5 21.6 -73.2 -13.5 174.1 185.3 175.0 156.0 19.1 609.5 43.7 2.3 -46.1 -23.5 69.9 57.0 65% 79% 31% 69% 55% 80% 5% 10% EFTA01475032 26% 36% 1.41% 0.68% -0.04% -0.02% 1.46% 0.68% -0.01% 0.05% 1.92% 0.73% 1.94% 1.04% 1.24% 0.61% 66% 79% Level 2.04% 0.61% 1.43% 1.36% 2.85% 0.20% 0.66% -0.02% -0.09% -0.09% -0.09% 0.00% -0.05% 2.16% 0.64% 1.52% 1.48% 2.95% 0.25% 0.76% Change vs 1 Wk Ago 4 Week Avg. 4 Wks Ago -0.11% 0.01% 0.08% -0.07% -0.04% 0.10% -0.05% -0.16% Level lyr Ago EFTA01475033 2.49% 0.52% 1.97% 1.76% 3.20% 0.77% 1.85% 0.21% 2.14% 1.32% 3.35% 0.25% 0.26% 4.21% 1.77% 2.44% 3.60% 4.81% 2.70% 2.70% 5yr Avg. 20yr Avg. Rel to Hist. Rel to Hist. 2.35% 3% 11% 2% 4% 2% 97% 89% 2% 96% 98% PCTL Risk Aver. Risk Aversion Incremental Level High High High Low High High High High Normal 35% Normal 21% Normal Normal 65% Normal High 79% 31% Normal 69% Normal EFTA01475034 55% Normal 80% 5% 10% 26% 72% 21% 77% 70% High Low Low Low 36% Normal Normal 67% Normal High Low High High Normal 36% Normal 52% Normal 53% Normal 79% High 43% Normal Normal 74% 82% 22% 85% 96% 4% 69% High High Low High High Low High Normal 54% Normal Normal Normal 53% Normal 83% Normal Down Down Up EFTA01475035 Up Down Up Up Flat Up Down Up Up Up Down Up Up Up Down Up Down Down Flat Down Down Up Down Up Up Up Down Down Up Down Up Up Up Down Up Up Down Up Up Up Up Up Up Up Not Safe No No Neutral No Not Safe No EFTA01475036 No Yes No No Yes Yes Neutral Neutral Neutral Neutral Neutral Yes below 18 below 18 below 3 below 40 below 40 below 10 0.8 - 1.2 below 18 below 17 below 17 above 5.5% above 4% $70 - $100 $70 - $100 Risk Aversion Flat Strategic Safety Caution Caution Caution Yes Caution Yes Yes Yes Neutral Yes Caution Neutral Yes Yes Yes No Yes No Yes Yes Yes EFTA01475037 Yes Neutral Caution $1.20 - $1.40 Safe Criteria 2 - 4% 0.5% - 2% bet. 1 - 3% 1.5% - 3% 2.5% - 4.5% below 2.5% below 2.5% above 100bps above 60bps below 200 below 200 below 50 below 600 below 50 below 25 below 0 bps below 100 bps below 100 bps below 100 bps EFTA01475038 US Equity Insights 2 October 2015 Page 12 Deutsche Bank Securities Inc. Figure 26: Advised S&P 500 Sector and Industry Allocation (2014/15 PE based on DB US Equity Strategy top down sector and industry EPS estimates) Market Advised Weight (%) Weight (%) Sector 2015 2016 PE PE IT Services 20.1% 20.5% Information Technology 15.6 14.6 Semiconductors Software Communications Equipment Electronic Equipment Biotechnology Health Care Equipment & Supplies 14.8% 16.2% Health Care Overweight 16.5% 17.2% Financials 15.7 14.4 Health Care Technology Life Sciences Tools & Services Pharmaceuticals Banks Capital Markets 12.6 12.0 Consumer Finance Electric Utilities Gas Utilities 3.1% 2.2% 3.4% 2.6% Utilities 16.0 15.5 Independent Power Producers Multi-Utilities Telecom 12.0 12.0 Telecommunication Services Overweight Technology Hardware, Storage & Peripherals Internet Software & Services EFTA01475039 2015 2016 PE PE 11.5 10.9 25.4 21.7 17.2 16.2 15.1 14.3 18.4 17.4 11.9 11.4 14.7 13.8 14.2 12.5 17.1 16.0 26.1 26.1 17.5 16.8 16.0 15.1 11.0 10.4 Diversified Financial Services 12.7 11.5 Insurance 10.6 10.2 REITs Real Estate Mgmt. & Development Thrifts & Mortgage Finance 15.4 15.0 18.2 18.2 10.8 9.9 17.3 16.6 12.0 12.0 Auto Components Automobiles Distributors Equalweight 13.3% 13.2% Consumer Discretionary 19.4 17.7 Household Durables Leisure Products Multiline Retail Specialty Retail Internet & Catalog Retail Media Food & Staples Retailing 10.0% 9.0% Consumer Staples 19.2 18.8 Airlines Underweight 10.1% 9.0% EFTA01475040 Industrials 15.5 15.0 7.1 6.6 Building Products Air Freight & Logistics Commercial Services & Supplies Industrial Conglomerates Professional Services Road & Rail Chemicals 2.8% 2.6% Materials 14.5 14.5 20.7 17.9 18.2 19.7 19.8 14.5 14.0 11.9 7.7 18.2 14.1 17.1 15.5 19.4 66.4 18.0 18.3 10.4 Diversified Consumer Services 7.4 Hotels, Restaurants & Leisure 15.9 Textiles, Apparel & Luxury Goods 12.5 17.1 13.7 17.1 53.1 17.0 17.7 Beverages Food Products Household Products Personal Products Tobacco 19.3 Aerospace & Defense 16.3 Construction & Engineering 17.0 Electrical Equipment 19.2 Machinery EFTA01475041 18.9 Trading Companies & Distributors 13.7 14.4 Construction Materials Containers & Packaging Metals & Mining Paper & Forest Products 7.0% 6.3% Energy 26.0 Aggregate PE of DB Industry allocations S&P 500 Index Source: Deutsche Bank Markets Research Prices as of 9/30/2015 19.5 Overweight 14.2 1920.03 13.4 Equalweight 2015 & 2016 DB Strategy EPS Bottom-up Cons. EPS 16.8 15.9 Energy Equipment & Services Oil, Gas & Consumable Fuels Underweight 120.0 128.0 2015 & 2016 DB Strategy PE 119.0 130.8 Bottom-up Cons. PE 21.7 21.5 17.8 17.1 19.2 18.6 26.0 22.8 18.8 19.0 16.3 15.8 11.3 11.0 13.7 13.7 14.6 15.1 14.8 13.4 39.2 32.7 15.7 14.6 16.7 13.9 10.2 10.2 19.5 19.5 27.9 19.5 19.6 17.7 16.0 15.0 16.1 14.7 19.3 16.1 23.4 21.5 EFTA01475042 24.1 21.7 19.4 10.9 18.0 14.8 24.3 18.4 10.6 17.3 14.8 10.6 Equalweight 2015 2016 PE PE Underweight 2015 2016 PE PE Health Care Providers & Services 15.7 14.1 EFTA01475043 2 October 2015 US Equity Insights Figure 27: Sector and Industry ETFs Note: Please see DB note "Equity ETPs capture $4.1bn during last week" published on May 27 2015. Click here for complete report Source: Deutsche Bank Deutsche Bank Securities Inc. Page 13 EFTA01475044 US Equity Insights 2 October 2015 Page 14 Deutsche Bank Securities Inc. Figure 28: S&P 500 Annual EPS Outlook and PE (based on current constituents in the index unless specified) EPS Y/Y 2005A S&P 500 EPS (historical index) S&P 500 EPS (current constituents) Sector ($ bn) Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities S&P 500 ($ bn) S&P ex. Financials ($bn) S&P ex. Energy ($bn) S&P ex. Tech ($bn) Energy & Financials ($bn) S&P ex. Energy and Financials ($bn) Key Macro Forecast Global GDP growth (real, DB est.) US GDP growth (real, DB est.) US Bus. FI (Equip + IPP, DB est.) US Unemployment Rate (year-end, DB est.) US 10yr Treasury Yield (year-end, Our est.) Bank Litigation (post-tax, $bn) Loan Loss Provisioning (% of loans, Our est.) US$/Euro (average/year-end, Our est.) Avg Oil Price (WTI/Brent, $/bbl) Avg Natural Gas Price (Henry Hub $/mmbtu) $76.28 $79.46 51.8 94.6 134.7 69.1 64.2 84.1 17.0 12.9 21.3 605.7 EFTA01475045 471.0 511.1 521.5 229.2 376.5 2006A $88.18 $91.20 55.3 57.2 2007A 2008A 2009A 2010A $85.12 $65.47 $60.80 $85.28 $93.86 $71.81 $64.40 $88.39 2007 - 14 shown below is agg. net income, 2014 y/y is EPS growth: 56.0 54.0 61.3 115.2 174.