Deutsche Bank Markets Research North America United States Periodical US Equity Insights 2016 S&P EPS growth to surge to 5%! Falling standards of excellence this cycle: Is there an objective passing grade? We reduce 2016E S&P EPS from $128 to $125. We're unsure of the tone of language appropriate to describe this reduction. Slashing or even cutting is too harsh as our new estimate is merely 2.5% lower. This trimming shouldn't surprise investors given recent commodity and currency markets. So is $125 good S&P EPS in 2016? Is it bullish or bearish? It's only 5% growth, subnormal mid-cycle real EPS growth, but 10x better than 2015. Thus, S&P EPS growth is set to surge in 2016! But is there an objectively healthy S&P EPS growth rate? In this note we present our new 2016E S&P EPS and we explain why a healthy S&P EPS growth rate is the nominal cost of equity less the dividend yield. 2016 S&P EPS cut from $128 to $125 on stronger dollar, lower oil assumptions We have long cautioned that every 10% appreciation in the dollar vs. mature currencies drags on S&P EPS growth by 2.5%. Every dime the Euro declines vs. USD hits S&P EPS by $1. Every $5/bbl oil price decline hits S&P EPS by $1, net of small benefits outside of Energy, Industrial Capital Goods & Materials; which all suffer. Airlines, Consumer Staples & Discretionary firms benefit from lower oil prices, but most of the cost savings is passed forward to customers. We lower our average 2016 Euro assumption from about $1.10 to $1.05. We raise our 2016 avg. DXY assumption from about 95 to 100. We lower our 2016 avg. oil price assumption from $60/bbl to $55/bbl and natural gas to $2.75. We also tempered our growth assumptions at US Retailers, Housing and Banks. 2015 did not have healthy underlying revenue or EPS growth ex oil and dollar S&P sales and operating EPS growth was broadly weak in 2015. Weakness extended beyond commodity producers and FX drags at multinationals. A surge in airline profits masked a significant Industrial Cap Goods profit decline. Revenue was flat at Financials with EPS growth from less litigation than 2014. No growth at Consumer Staples despite lower input costs. Good growth at Retailers, but disappointing given the macro tailwinds owing to fierce price competition. Strong at auto, but home builders disappointed. The strongest growth was at Health Care and consumer oriented Tech firms. Corporate tech spending on equip. and software remains very sluggish and chip makers were flattish on earnings given slow PC, handset and weak industrial end markets. Ex. Energy, Financials, HC and AAPL, AMZN & GOOG 2015 S&P EPS growth is EFTA01476303

-2.5%; this is the underlying trend with —4% FX drag that should fall to —1.5%. Stronger revenue growth is key to achieving healthy S&P EPS growth in 2016 Strong revenue growth at Health Care, better capex on productivity enhancers like tech equip/software, slower but still strong revenue growth at consumer oriented big cap Tech are key to our 4% S&P sales growth, 1% share shrink and flat net margin estimates for 2016. Some cyclically risky sectors like Auto Airlines, Chemicals & Semiconductors must avoid losing any earnings power. Margin expansion is possible, but upside counterbalanced by downside risk Fierce price competition at Retailers, more global competition at Industrials and the political threats at Health Care pose some sales risk, but mostly margin risk. There is also tax rate risk. Many are concerned about wage pressure on margins, but this is not a major risk for S&P firms. However, a tighter than expected labor market could lead to more Fed hikes than expected and thus EPS risks via dollar, oil or PE risk via credit market or a Tsy yield jump. Fed hikes are a small boost to S&P EPS. 5% delineates healthy from unhealthy S&P EPS growth and supports an 18 PE Our 1 year target of 18x trailing S&P EPS uses a 5.5% real and 7.5% nominal CoE. EPS is retained, so real EPS g must = real CoE - div yld to justify a PE = 1/- real CoE. Date 20 November 2015 David Bianco Strategist (+1) 212 250-8169 [email protected] Winnie Nip Strategist (+1) 415 617-3297 [email protected] S&P 500 Key Forecasts Price Ju Wang Strategist (+1) 212 250-7911 [email protected] 2089.17 Next 5%+ move Balanced Risk 2014 Year-end Target 2058.90 EPS Target P/E Current P/E EFTA01476304

DPS $118 17.4x 17.7x $38.30 Related recent research S&P should finish the year in black, but more red ahead for Energy Amazing margins, but mind the GAAP A structural slowing of Industrials: Investing around this late cycle risk Don't pull the plug on Health Care US Equity Strategy Baskets High Foreign Cash (Repatriation Beneficiaries) Big-Cap Reasonable PE Tech Challenged Industrial Capital Goods US Domestic Strength 2015E 20502100 $119 17.4x 17.6x $41 2016E 22502300 $125 18.2x 16.7x $44 Date 16 Nov 2015 8 Nov 2015 1 Nov 2015 23 Oct 2015 Bloomberg Ticker DBUSHIFC DBUSBRTE DBUSCICG DBUSDMST Deutsche Bank Securities Inc. Deutsche Bank does and seeks to do business with companies covered in its EFTA01476305

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. EFTA01476306

20 November 2015 US Equity Insights 2016E S&P EPS cut from $128 to $125 mostly on stronger dollar and lower oil price assumptions We have long cautioned that every 10% appreciation in the dollar vs. mature currencies drags on S&P EPS growth by 2.5%. Every dime the Euro declines vs. USD hits S&P EPS by $1. Every $5/bbl oil price decline hits S&P EPS by $1, net of small benefits outside of Energy, Industrial Capital Goods & Materials; which all suffer. Airlines, Consumer Staples & Discretionary firms benefit from lower oil prices, but most of the cost savings is passed forward to customers. We lower our average 2016 Euro assumption from about $1.10 to $1.05. We raise our 2016 avg. DXY assumption from about 95 to 100. We lower our 2016 avg. oil price assumption from $60/bbl to $55/bbl and natural gas to $2.75. We also tempered our growth assumptions at US Retailers, Housing and Banks. Figure 1: DXY & EUR/USD 2015YTD avg: 96.0 100 2013 & 2014 EUR avg: 1.33 2012 EUR avg: 1.29 75 80 85 90 95 2015YTD EUR avg: 1.11 2012 avg: 80.6 2013 avg: 80.4 2014 avg: 82.6 1.00 1.05 1.10 1.15 1.20 1.25 1.30 1.35 1.40 1.45 DXY (lhs) Source: Bloomberg Finance LP, Deutsche Bank EUR/USD (rhs) Figure 2: Oil prices (1st month futures) 105 115 125 EFTA01476307

35 45 55 65 75 85 95 WTI Source: Bloomberg Finance LP, Deutsche Bank Brent 105 115 125 35 45 55 65 75 85 95 Figure 3: WTI now expected to settle at —$50 at 2016 end and stay under $55 even by 2018 end WTI futures prices over time $35 $40 $45 $50 $55 $60 $65 $70 $75 $35 $40 $45 $50 $55 $60 $65 $70 $75 $40 $45 $50 $55 $60 $65 $70 $75 $80 Figure 4: Brent now expected to settle at —$50 at 2016 EFTA01476308

end and stay under $60 even by 2018 end Brent futures prices over time $40 $45 $50 $55 $60 $65 $70 $75 $80 Dec 2015 Dec 2016 Source: Bloomberg Finance LP, Deutsche Bank Dec 2017 Dec 2018 Dec 2015 Dec 2016 Source: Bloomberg Finance LP, Deutsche Bank Dec 2017 Dec 2018 Figure 5: Weak oil prices: Industry impact spectrum Detriment Benefit Energy Industrial Cap Gds Machinery Materials Metals & Mining, mixed for Chems Utilities MLPs Rails Based on observed EPS history and DB estimates, oil prices have no material influence on Health Care or Telecom Source: Deutsche Bank Tech Financials REITs Cons. Disc. Retailers Cons. Staples Transports Packaged Food Airlines/Trucking Page 2 Deutsche Bank Securities Inc. Front Month Futures ($/barrel) Jan-13 Mar-13 May-13 Jul-13 Sep-13 EFTA01476309

Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 EFTA01476310

US Equity Insights 20 November 2015 Deutsche Bank Securities Inc. Page 3 Figure 6: S&P 2016 EPS scenarios Poor global growth (China —5%) A continued profit recession, Foreign Cons Disc Cons Staples Energy Financials Health Care Industrials Tech Materials Telecom Utilities S&P 500 per share Avg oil price Euro Avg FF rate US UE yr end US GDP Global GDP Source: Deutsche Bank Sales % Profits % 27% 28% 41% 18% 20% 36% 59% 49% 1% 6% 31% FX A possible upside scenario 2015 2016 25% 28% 20% 15% 20% 35% 37% 40% 0% EFTA01476311

6% 25% 115.5 85.5 45 218 154.5 115 225 30.3 33.5 33.4 1055 7 $119 $47 89 y/y 2016 EPS 128 10.8% 14.39 4.1% 10.01 6.75 60 33.3% 234 168 120 242 34.5 1142 $128 $60 1.10 1.10-1.15 0.2% 0.75% 5.0% 4.7% 2.5% 2.5-3% 3% 3.5% 34 12.2% 32.5 -3.0% 3.3% 7.3% 26.31 8.7% 18.89 4.3% 13.49 7.6% 27.21 3.82 3.65 3.88 8.2% 128.39 DB's base case for 2016 S&P EPS 2016 125 87.5 EFTA01476312

2015 115.5 85.5 45 218 154.5 115 225 30.3 33.5 33.4 1055.7 $119 $47 1.05 2.3% 52 15.6% 230 165 117 239 32.5 32.5 34.5 1115 $125 $55 1.05 0.2% 0.50% 5.0% 2.5% -2.5% 3% -3.0% 4.7% y/y 2016 EPS 8.2% 14.05 9.84 5.85 5.5% 25.86 6.8% 18.55 1.7% 13.15 6.2% 26.87 7.3% -3.0% 3.3% but decent US and global GDP growth y/y 2016 EPS 2015 115.5 85.5 45 218 EFTA01476313

3.65 3.65 3.88 5.6% 125.35 154.5 115 225 30.3 33.5 33.4 2016 125 85.5 230 161 232 34.5 1055 7 1064.5 $119 $47 1.05 $40 0.90 0.2% 0.50% 5.0% 4.7% 2.5% -2.5% 3% -3.0% 8.2% 14.05 0.0% 30 -33.3% 5.5% 25.86 4.2% 18.10 105 -8.7% 11.80 3.1% 26.08 3.26 3.65 3.88 0.8% 119.68 $120 29 -4.3% 32.5 -3.0% 3.3% 9.61 3.37 yet 2%+ US growth with low credit costs Tight US labor mkt, Fed hikes >1% in 2016 Global recession and flat US GDP y/y 2016 EPS 2015 115.5 85.5 EFTA01476314

45 218 154.5 115 225 30.3 33.5 33.4 1055.7 $119 $47 1.05 0.2% 5.0% 2016 122 85 233 160 225 5.6% 13 72 -0.6% 30 -33.3% 9.56 3.37 6.7% 26.16 3.6% 17.99 100 -13.0% 11.24 0.0% 25.30 2.92 3.60 3.82 26 -14.2% -4.5% 1.8% 32 34 1046.7 $118 $40 0.90 1.2% 4.4% 2.5% 2.25% 3% 2.5% -0.9% 117.68 2015 115.5 85.5 45 EFTA01476315

218 154.5 115 225 30.3 33.5 33.4 1055.7 $119 $47 1.05 2016 y/y 2016 EPS 110 -4.8% 12.37 83 -2.9% 20 -55.6% 210 -3.7% 23.61 2.3% 17.76 158 90 -21.7% 10.12 210 -6.7% 23.61 23 -24.1% 30 -10.4% 32.5 -2.7% 966.5 -8.4% 108.66 $109 $35 0.85 0.2% 0.25% 5.0% 2.5% 3% 6.5% 0.5% 1.5% 2.59 3.37 3.65 9.33 2.25 Figure 7: S&P annual EPS rule-of-thumb sensitivities Rules of thumb sensitivities Oil prices: Every $5/bbl decline in oil prices reduces S&P net income by roughly $7.5bn or nearly $1 EPS Dollar FX rates: Every 10% appreciation in the dollar vs. mature currencies (DXY) tends to reduce S&P net income by $20bn or —$2.50 of EPS FF rate: Every 25bp on the FF rate, if it similarly moves net interest margins at banks is —$0.50 to S&P US GDP: S&P EPS is most sensitive to US investment spending on equipment and software and exports Global GDP: S&P EPS tends to be more sensitive to global GDP than US GDP EFTA01476316

Source: Deutsche Bank EFTA01476317

US Equity Insights 20 November 2015 Page 4 Deutsche Bank Securities Inc. Figure 8: S&P 500 Advised 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 Biotechnology Health Care Equipment & Supplies 14.5% 18.0% Health Care 17.0 15.9 Health Care Technology Life Sciences Tools & Services Pharmaceuticals Technology Hardware, Storage & Peripherals Internet Software & Services IT Services 21.0% Overweight 16.4% 17.2% Financials 21.0% Information Technology 17.5 16.5 Semiconductors Software Communications Equipment Electronic Equipment Banks Capital Markets 14.0 13.2 Consumer Finance Electric Utilities Gas Utilities 2.9% 2.3% 3.4% 2.6% Utilities 15.7 15.2 Independent Power Producers Multi-Utilities Telecom 12.6 13.0 Telecommunication Services Overweight EFTA01476318

2015 2016 PE PE 15.1 13.5 21.8 20.4 27.2 23.6 19.5 18.8 17.1 16.3 12.2 11.5 29.8 26.6 19.0 17.9 16.6 16.1 21.4 20.2 12.2 11.7 17.5 16.3 12.1 11.5 Diversified Financial Services 15.0 13.9 Insurance 11.7 11.2 REITs Real Estate Mgmt. & Development Thrifts & Mortgage Finance 15.0 14.7 21.2 19.8 10.8 9.8 17.1 16.5 12.6 13.0 Auto Components Automobiles Distributors Equalweight 13.0% 13.2% Consumer Discretionary 21.1 19.5 Household Durables Leisure Products Multiline Retail Specialty Retail Internet & Catalog Retail Media Food & Staples Retailing 9.6% 8.5% Consumer Staples 20.6 20.1 Airlines Underweight 10.3% 8.5% EFTA01476319

Industrials 16.8 16.5 7.3 8.3 Building Products Air Freight & Logistics Commercial Services & Supplies Industrial Conglomerates Professional Services Road & Rail Chemicals 3.0% 2.6% Materials 17.9 16.7 24.2 18.8 19.6 23.0 20.1 15.9 17.3 13.7 8.6 19.5 16.6 21.2 14.5 21.1 80.7 18.9 18.1 12.7 Diversified Consumer Services 8.2 Hotels, Restaurants & Leisure 18.2 Textiles, Apparel & Luxury Goods 14.7 20.0 13.6 19.4 64.6 17.8 17.5 Beverages Food Products Household Products Personal Products Tobacco 22.6 Aerospace & Defense 17.6 Construction & Engineering 18.7 Electrical Equipment 21.8 Machinery EFTA01476320

18.3 Trading Companies & Distributors 15.0 16.5 Construction Materials Containers & Packaging Metals & Mining Paper & Forest Products 7.0% 5.0% Energy 28.5 Aggregate PE of DB Industry allocations S&P 500 Index Source: Deutsche Bank Markets Research 24.6 Overweight 15.6 2081.24 14.9 Equalweight 2015 & 2016 DB Strategy EPS Bottom-up Cons. EPS 18.5 17.4 Energy Equipment & Services Oil, Gas & Consumable Fuels Underweight 119.0 125.0 2015 & 2016 DB Strategy PE 118.8 128.5 Bottom-up Cons. PE 23.1 22.9 21.3 20.4 20.6 20.0 27.7 24.2 20.3 20.6 17.7 16.7 13.7 13.7 16.3 16.3 15.5 16.0 16.7 15.9 45.6 38.0 16.1 15.4 28.3 18.5 11.0 11.0 20.9 29.9 30.6 23.8 21.3 20.0 17.5 16.6 17.5 16.2 18.3 16.7 25.0 22.8 23.6 21.5 EFTA01476321

20.9 12.3 18.8 17.4 33.2 19.3 11.7 18.0 16.1 11.7 Equalweight 2015 2016 PE PE Underweight Health Care Providers & Services 2015 2016 PE PE 16.0 15.2 EFTA01476322

US Equity Insights 20 November 2015 Deutsche Bank Securities Inc. Page 5 Figure 9: S&P EPS Model by sector — 2016 S&P EPS cut from $128 to $125 on stronger dollar, lower oil assumptions EPS Bottom-up 2005A S&P 500 EPS (historical index) S&P 500 EPS (current constituents) Sector ($ 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.) US$/Euro (year-end, DB est.) Avg Oil Price (WTI/Brent, $/bbl) Avg Natural Gas Price (Henry Hub $/mmbtu) $76.28 $79.53 51.6 94.0 133.8 68.6 63.2 83.6 17.4 13.9 21.4 EFTA01476323

603.1 469.3 509.1 519.5 227.8 375.3 2006A $88.18 $91.14 53.9 57.0 2007A 2008A 2009A 2010A $85.12 $65.47 $60.80 $85.28 $93.81 $71.79 $64.23 $88.54 2007 - 14 shown below is agg. net income, 2014 y/y is EPS growth: 55.6 52.5 61.1 114.3 173.1 73.0 71.0 97.6 21.2 18.0 23.4 702.6 529.4 588.3 605.0 287.5 415.1 118.7 143.8 81.8 83.9 121.4 24.8 26.4 25.9 740.2 596.5 621.6 618.8 262.4 477.8 40.9 66.8 EFTA01476324

141.5 -19.9 86.7 75.3 122.1 21.0 27.0 26.9 588.2 608.1 446.7 466.1 121.6 466.6 48.6 68.9 59.0 56.6 88.3 51.7 105.6 13.2 21.8 26.6 540.3 483.7 481.3 434.7 115.6 424.7 74.1 73.6 94.5 129.0 101.3 73.8 151.4 24.9 23.2 28.2 773.9 644.9 679.4 622.5 223.5 550.4 2011A 2012A 2013A 2014A Y/Y EFTA01476325

$97.82 $103.75 $110.39 $118.82 7.6% $99.73 $105.09 $111.63 $117.75 5.5% $118.84 0.9% $128.55 8.2% 84.0 78.0 129.7 132.5 109.6 88.2 175.2 31.7 22.4 29.5 880.7 748.2 751.0 705.4 262.1 618.5 90.4 78.7 122.1 162.6 112.5 94.3 185.7 29.2 23.9 29.8 929.1 766.6 807.0 743.5 284.6 644.5 99.5 84.2 113.9 189.1 117.9 102.5 193.1 30.5 25.1 30.4 986.2 797.1 872.3 793.1 303.0 683.2 102.9 $119 EFTA01476326

86.2 112.3 189.9 136.3 113.4 209.8 32.7 30.7 33.2 1047.4 857.5 935.1 837.6 302.2 745.2 4.7% 5.2% 5.3% 2.7% -0.4% 5.2% 3.9% 3.2% 2.8% 3.4% 3.4% 2.7% 1.8% -0.3% -2.8% 2.5% 1.9% 2.8% 1.9% 2.6% 8.4% 7.1% 3.8% -3.1% -14.1% 9.4% 9.2% 5.9% 4.1% -5.5% 4.9% 4.4% 5.0% 7.3% 9.9% 9.5% 8.6% 7.8% 7.0% 5.7% 4.4% 4.7% 3.9% 2.5% 3.8% 3.3% 1.9% 1.8% 3.0% 2.2% 8.9 5.7 8.4 14.3 23.3 0.8% 0.7% 1.3% 3.0% 4.2% 2.6% 1.2% 0.8% 0.4% 0.4% 1.25/1.18 1.26/1.32 1.37/1.46 1.47/1.40 1.39/1.32 1.33/1.29 1.39/1.30 1.28/1.32 1.33/1.38 1.33/1.21 56/54 8.67 Source: Deutsche Bank Based on current constituents in the index unless specified 66/65 6.74 72/72 6.96 100/97 8.88 61/61 3.95 79/79 4.40 95/111 3.99 94/111 2.75 98/108 3.73 93/99 4.26 3.4% 115.5 EFTA01476327

2.4% 85.1 -1.5% 46.8 0.4% 216.8 15.6% 155.0 10.7% 116.3 8.6% 224.1 7.4% 30.6 22.1% 33.7 9.2% 33.2 6.2% 1057.1 7.6% 840.3 7.2% 1010.3 5.6% 833.0 -0.3% 263.6 9.1% 793.5 -1.3% 91.0 -58.4% 46.8 14.2% 235.5 13.7% 168.9 2.6% 121.5 6.8% 243.3 -6.5% 34.3 9.8% 34.9 -0.1% 34.4 0.9% 1143.4 -2.0% 907.9 8.0% 1096.6 -0.6% 900.1 -12.8% 282.3 6.5% 861.1 15.0% 115.5 6.9% 85.5 0.1% 45.0 8.6% 218.0 9.0% 154.5 4.4% 115.0 8.6% 225.0 12.0% 30.3 3.4% 33.5 3.7% 33.5 8.2% 1055.7 8.0% 837.7 8.5% 1010.7 8.1% 830.7 7.1% 263.0 8.5% 792.7 3.1% 2.1% -4% 4.8% 2.25% EFTA01476328

4 5 0.6% -$1.10 1.05 -$50 -2.50 1.1% $125 All 2015/16 estimates are aggregate earnings representative of EPS 12.3% 132.8 12.2% 125.0 -0.8% 87.5 -59.9% 52.0 14.8% 230.0 13.4% 165.0 1.4% 117.0 7.3% 239.0 -7.5% 32.5 9.1% 32.5 0.7% 34.5 5.0% $122 8.3% 115.5 2.3% 85.5 15.6% 80.0 5.5% 218.0 6.8% 151.5 1.7% 112.2 6.2% 225.0 7.3% 31.4 -3.0% 33.5 3.1% 33.5 1.1% 1114.9 5.0% 1086.0 -2.3% 884.9 5.6% 868.0 8.1% 1062.9 5.2% 1006.0 -0.8% 875.9 -13.0% 282.0 6.4% 832.9 5.4% 861.0 7.2% 298.0 5.1% 788.0 3.5% 2.7% -4% 4.5% 2.75% 2 0.5% -$1.05 0.90 -$55 -2.75 EFTA01476329

<3% 0.75% $1.10-1.15 -$65 - 3.00 103% 100% 100% 178% 100% 98% 98% 100% 104% 100% 100% 103% 104% 100% 104% 113% 99% 2015E Y/Y 2016E Y/Y 2015E DB US Equity Strategy Y/Y 2016E Normalized 2015 Y/Y ($) % of 2015 EFTA01476330

US Equity Insights 20 November 2015 Page 6 Deutsche Bank Securities Inc. Figure 10: S&P EPS Model by industry (1 of 2) 2005A 2006A CONSUMER DISCRETIONARY ($bn) Auto Components Automobiles Distributors Diversified Consumer Services Hotels, Restaurants & Leisure Household Durables Internet & Catalog Retail Leisure Products Media Multiline Retail Specialty Retail Textiles, Apparel & Luxury Goods CONSUMER STAPLES ($bn) Beverages Food & Staples Retailing Food Products Household Products Personal Products Tobacco ENERGY ($bn) Energy Equipment & Services Oil, Gas & Consumable Fuels FINANCIALS ($bn) Capital Markets Banks Consumer Finance Diversified Financial Services Insurance Real Estate Investment Trusts (REITs) Real Estate Management & Development Thrifts & Mortgage Finance HEALTHCARE ($bn) Biotechnology Health Care Equipment & Supplies Health Care Providers & Services Health Care Technology Life Sciences Tools & Services Pharmaceuticals 53.9 2007A 52.5 1,423 3,454 EFTA01476331

434 567 7,420 5,352 692 700 13,078 5,131 15,042 2,269 51.6 10,386 10,759 7,801 10,956 251 11,485 94.0 6,038 133.8 15,673 69,061 5,600 3,165 1,533 (1,711) 472 428 8,153 3,788 577 746 5,931 2,817 57.0 1,939 519 502 427 9,029 (2,025) 909 859 5,528 2008A 2009A 2010A 40.9 1,354 (6,288) 472 494 9,208 EFTA01476332

(2,460) 1,158 655 4,344 3,393 66.8 48.6 332 396 501 74.1 2011A 2007 - 55.6 2,354 2014 shown below is aggregate net income, 2014 y/y is EPS growth: 69 12,291 471 438 8,480 10,326 (263) 1,549 831 5,023 3,383 68.9 1,384 2,123 1,016 15,151 16,986 16,265 15,425 18,574 6,196 16,045 14,639 12,310 12,847 14,779 3,236 61.1 4,099 73.6 11,407 13,256 14,398 14,586 16,411 11,879 13,960 15,323 15,742 16,462 8,266 8,625 268 8,928 10,298 11,651 13,058 14,777 16,354 16,955 16,521 256 222 118.7 143.8 141.5 243 59.0 12,135 10,242 11,529 11,062 12,137 114.3 EFTA01476333

94.5 10,634 14,712 19,272 12,769 12,051 173.1 (19.9) 129.0 22,636 20,810 10,948 17,073 20,564 78,646 54,072 (17,914) 6,707 2,288 6,320 3,082 30,279 9,386 198 398 69.1 5,062 13,260 12,599 76 1,179 36,969 428 480 3,216 394 8,867 179 609 87.7 8,010 159 2,326 388 51,586 7,189 8,806 13,138 51,613 47,404 (26,200) 20,581 26,359 10,526 11,160 299 422 6,688 94 611 73.7 6,259 82.6 7,046 127 89.4 9,220 178 EFTA01476334

102.5 9,949 13,706 15,061 17,284 18,656 20,079 14,952 16,835 15,183 15,859 17,985 98 1,458 Source: Deutsche Bank, IBES 2007 - 2014 shown below is aggregate net income, 2014 y/y is EPS growth 2,326 2,500 2,103 2,756 37,226 41,208 44,533 43,409 51,559 220 9,293 206 644 382 84.0 3,566 12,310 559 393 11,867 1,986 2,343 1,096 22,014 6,987 16,018 4,887 78.0 17,613 17,336 12,715 15,795 485 14,025 129.7 14,886 132.3 15,695 55,025 9,910 2012A 90.4 3,782 10,832 642 415 12,003 EFTA01476335

3,597 2,042 1,209 25,579 7,302 17,370 5,671 78.7 17,300 19,249 10,963 16,064 572 14,531 122.1 16,874 87,976 103,680 103,941 122,236 46,261 82,431 114,789 56.6 11,536 27,881 12,463 288 (502) 110.9 11,009 21,631 20,796 283 3,278 53,915 162.6 18,152 67,599 10,824 13,752 36,495 14,899 344 500 114.1 12,292 22,952 22,813 366 3,544 52,089 2013A 99.5 4,616 11,678 646 105,211 EFTA01476336

452 12,536 5,643 2,980 1,225 27,898 6,680 18,721 6,379 84.2 18,055 20,396 13,666 16,617 674 14,794 113.9 17,681 96,265 188.8 23,804 76,558 12,217 15,412 43,545 16,466 409 415 119.5 14,114 18,523 24,935 433 3,619 57,897 2014A Y/Y 102.9 3% 5,156 12% 705 9% 474 5% 2015E Y/Y 2016E Y/Y 2015E 115.5 12.3% 132.8 15.0% 5,384 4.4% 702 -0.4% 545 14.8% 755 7.5% 115.5 EFTA01476337

639 17.3% Y/Y 6,255 16.2% 5,400 4.7% 700 -0.7% 550 16.0% 2016E 12.2% 125.0 Y/Y 5,800 7.4% 750 7.1% 600 9.1% Normalized 2015 ($) % of 2015 8.3% 115.5 100% 5,400 100% 9,867 -16% 14,184 43.7% 16,329 15.1% 14,000 41.9% 14,700 5.0% 14,000 100% 700 100% 550 100% 12,652 1% 4,350 -23% 3,391 14% 865 -29% 30,273 9% 7,300 9% 20,781 11% 7,048 10% 86.2 2% 18,510 3% 21,253 4% 14,968 10% 16,534 0% 685 2% 112.3 -1% 20,584 16% 189.9 0% 26,314 11% 12,199 0% 17,166 11% 21,969 33% 484 18% 412 -1% 13,627 7.7% 15,730 15.4% 13,700 8.3% 15,000 9.5% 13,700 100% 4,800 100% 4,850 11.5% 4,415 30.2% 815 -5.8% 7,589 4.0% 5,580 15.1% 4,800 10% 800 -7.5% 5,400 12.5% EFTA01476338

6,654 50.7% 4,800 41.6% 6,000 25.0% 927 13.8% 850 6.3% 8,328 9.7% 91.0 6.9% 7,500 2.7% 8,000 6.7% 7,900 9.7% 87.5 2.3% 4,800 100% 800 100% 32,747 8.2% 37,026 13.1% 33,000 9.0% 35,000 6.1% 33,000 100% 7,500 100% 23,331 12.3% 26,469 13.4% 23,000 10.7% 25,000 8.7% 23,000 100% 7,200 100% 100% 7,316 3.8% 85.1 -1.3% 8,152 11.4% 7,200 2.2% 85.5 -0.8% 85.5 18,361 -0.8% 19,513 6.3% 18,300 -1.1% 18,500 1.1% 18,300 100% 22,173 4.3% 23,256 4.9% 22,500 5.9% 23,300 3.6% 22,500 100% 14,029 -6.3% 15,722 12.1% 14,000 -6.5% 14,600 4.3% 14,000 100% 15,844 -4.2% 16,575 4.6% 16,000 -3.2% 16,500 3.1% 16,000 100% 700 100% 683 -0.3% 46.8 -58.4% 779 14.2% 46.8 0.1% 700 2.3% 800 14.3% 14,274 -4% 14,031 -1.7% 15,147 8.0% 14,000 -1.9% 13,800 -1.4% 14,000 100% 45.0 -59.9% 52.00 15.6% 80.0 216.8 14.2% 235.5 8.6% 218.0 178% 10,696 -48.0% 6,890 -35.6% 10,000 -51.4% 7,000 -30% 15,000 150% 91,707 -5% 36,065 -60.7% 39,930 10.7% 35,000 -61.8% 45,000 28.6% 65,000 186% 218.0 14.8% 230.0 5.5% 100% 27,020 2.7% 30,868 14.2% 27,300 3.7% 29,500 8.1% 27,300 100% 68,385 -11% 92,332 35.0% 98,156 6.3% 93,200 36.3% 98,000 5.2% 93,200 100% 11,887 -2.6% 12,637 6.3% 12,000 -1.6% 12,500 4.2% 12,000 100% 18,040 5.1% 21,396 18.6% 18,000 4.9% 19,500 8.3% 18,000 100% 42,951 -1% 43,172 0.5% 46,390 7.5% 43,100 0.3% 45,000 4.4% 43,100 100% 23,460 6.8% 25,009 6.6% 23,500 7.0% 24,500 4.3% 23,500 100% 600 100% 300 100% 98% EFTA01476339

586 21.0% 295 -28.4% 138.1 16% 26,719 89% 20,386 10% 26,541 6% 504 16% 4,464 23% 59,445 3% 667 14.0% 346 17.4% 155.0 12.3% 168.9 9.0% 600 23.9% 300 -27.2% 650 8.3% 350 16.7% 154.5 11.9% 165.0 6.8% 151.5 37,528 40.5% 40,218 7.2% 38,500 44.1% 43,000 11.7% 38,500 100% 19,364 -5.0% 21,291 10.0% 17,500 -14.2% 18,700 6.9% 17,500 100% 29,977 12.9% 33,541 11.9% 30,000 13.0% 31,500 5.0% 27,000 90% 632 25.5% 4,316 -3.3% 718 13.6% 650 29.0% 4,801 11.2% 4,350 -2.5% 750 15.4% 4,500 3.4% 650 100% 4,350 100% 63,174 6.3% 68,332 8.2% 63,500 6.8% 66,500 4.7% 63,500 100% EFTA01476340

US Equity Insights 20 November 2015 Deutsche Bank Securities Inc. Page 7 Figure 11: S&P EPS Model by industry (2 of 2) 2005A 2006A INDUSTRIALS ($bn) Aerospace & Defense Air Freight & Logistics Airlines Building Products Commercial Services & Supplies Construction & Engineering Electrical Equipment Industrial Conglomerates Machinery Professional Services Road & Rail Trading Companies & Distributors INFORMATION TECHNOLOGY ($bn) Communications Equipment Technology Hardware, Storage & Peripherals IT Services Software MATERIALS ($bn) Chemicals Metals & Mining Paper & Forest Products TELECOMMUNICATION SERVICES ($bn) UTILITIES ($bn) Electric Utilities Gas Utilities Multi-Utilities 71.0 2007A 83.9 13,997 4,924 (2,963) 958 5,897 414 3,025 22,232 10,111 713 3,215 663 83.6 11,360 EFTA01476341

17,783 Electronic Equipment, Instruments & Components 1,454 Internet Software & Services 3,551 14,226 Semiconductors & Semiconductor Equipment 15,276 19,948 17.4 Construction Materials Containers & Packaging 11,063 526 1,070 4,204 516 13.9 21.4 12,373 194 772 Independent Power and Renewable Electricity Producers 8,057 2008A 2009A 2010A 75.3 51.7 73.8 2011A 2007 - 2014 shown below is aggregate net income, 2014 y/y is EPS growth: 63.2 16,143 21,089 21,283 17,753 20,532 5,553 (3,940) 882 5,114 546 3,631 797 5,754 1,464 659 3,296 844 4,029 4,721 (2,835) 109 3,580 1,242 4,111 857 3,452 EFTA01476342

(3,356) 25 3,277 1,176 2,687 4,752 2,591 56 3,612 867 3,835 24,932 27,201 22,830 15,318 17,891 11,980 12,641 12,380 882 6,747 11,764 (90) 4,616 790 97.6 5,085 908 121.4 6,060 928 122.1 4,215 495 105.6 151.4 13,448 13,708 13,448 12,992 15,777 26,262 38,703 38,380 21,589 34,033 1,961 5,162 3,616 7,128 13,172 14,879 24.8 3,808 8,466 9,832 21.0 3,000 4,828 9,197 11,789 16,461 18,598 21,833 23,225 27,369 8,163 23,992 21,096 24,800 26,316 27,394 33,620 21.2 13.2 12,009 13,313 12,173 716 EFTA01476343

709 1,081 6,786 630 18.0 23.4 1,093 8,406 Source: Deutsche Bank, IBES 2007 - 2014 shown below is aggregate net income, 2014 y/y is EPS growth 1,516 8,338 950 26.4 25.9 211 1,260 9,176 360 1,559 6,108 843 27.0 26.9 208 1,959 9,449 1,328 2,995 371 21.8 26.6 223 1,670 24.9 8,405 15,424 102 (6) 1,438 7,168 878 23.2 28.2 13,646 15,204 15,261 14,857 16,442 213 1,178 9,888 10,358 238 920 6,264 728 EFTA01476344

88.2 23,118 5,745 1,563 7 3,650 1,062 4,848 20,687 17,511 1,324 7,648 1,060 175.2 17,039 47,528 4,530 13,955 30,354 23,937 37,905 31.7 20,512 (26) 1,297 8,540 1,332 22.4 29.5 17,508 236 1,138 10,605 2012A 94.3 23,181 5,984 2,400 112 3,396 1,366 5,051 22,656 18,886 1,557 8,280 1,427 185.7 18,963 57,598 3,754 EFTA01476345

16,068 31,272 19,351 38,660 29.2 20,796 46 1,296 5,858 1,155 23.9 29.8 17,984 290 986 10,544 2013A 102.5 26,449 5,992 5,724 474 3,645 1,390 5,821 23,844 16,710 1,744 9,002 1,689 193.1 21,367 53,981 3,780 19,854 35,794 20,165 38,190 30.5 22,693 128 1,444 4,819 1,401 25.1 30.4 18,830 304 555 10,741 2014A EFTA01476346

Y/Y 113.4 11% 29,332 11% 6,361 6% 10,010 75% 599 26% 3,839 5% 1,525 10% 6,174 6% 24,285 2% 17,199 3% 2,006 15% 10,146 13% 1,963 16% 209.8 9% 21,413 0% 58,701 9% 4,304 14% 24,308 22% 36,653 2% 27,382 36% 32.7 7% 24,473 8% 333 160% 2,193 52% 4,469 -7% 1,280 -9% 30.7 22% 33.2 9% 19,691 5% 563 85% 1,085 96% 11,879 11% 2015E Y/Y 116.3 2.6% 7,413 16.5% 4,013 4.5% 2016E Y/Y 121.5 4.4% 2015E Y/Y 115.0 1.4% 2016E Y/Y 117.0 1.7% 8,258 11.4% 7,300 14.8% 7,800 845 23.4% 4,289 6.9% 5,757 0.6% 6.8% EFTA01476347

700 16.9% 4,000 4.2% 750 7.1% 4,200 5.0% Normalized 2015 ($) % of 2015 112.2 17,091 70.7% 14,805 -13.4% 17,000 69.8% 15,000 -12% 15,300 684 14.3% 1,296 -15.0% 1,394 7.6% 5,723 -7.3% 1,300 -14.7% 1,300 0.0% 5,500 -10.9% 5,500 0.0% 2,410 11.6% 2,100 4.7% 2,300 9.5% 2,000 5.3% 239.0 6.2% 98% 29,413 0.3% 31,789 8.1% 29,300 -0.1% 31,000 5.8% 29,300 100% 7,300 100% 90% 700 100% 4,000 100% 1,235 5,225 95% 95% 21,279 -12.4% 24,367 14.5% 21,000 -13.5% 22,100 5.2% 21,000 100% 95% 15,350 -10.7% 14,752 -3.9% 15,000 -12.8% 14,500 -3.3% 14,250 2,160 7.7% 9,834 -3.1% 10,675 8.5% 2,088 6.3% 224.1 6.8% 2,171 4.0% 243.3 8.6% 9,900 -2.4% 10,500 6.1% 1,900 -3.2% 225.0 7.3% 225.0 2,100 100% 9,900 100% 1,900 100% 100% 21,374 -0.2% 22,026 3.1% 21,600 0.9% 22,500 4.2% 21,600 100% 70,219 19.6% 75,362 7.3% 70,800 20.6% 75,000 5.9% 70,800 100% 4,100 100% 4,179 -2.9% 4,510 7.9% 4,100 -4.7% 4,400 7.3% EFTA01476348

25,112 3.3% 29,979 19.4% 25,500 4.9% 28,600 12.2% 25,500 100% 38,022 3.7% 41,148 8.2% 38,000 3.7% 40,300 6.1% 38,000 100% 27,838 1.7% 29,248 5.1% 27,500 0.4% 28,500 3.6% 27,500 100% 36,992 -3% 37,325 0.9% 41,026 9.9% 37,500 1.4% 39,700 5.9% 37,500 30.3 -7.5% 30.6 -6.5% 532 59.8% 2,151 -1.9% 1,554 21.4% 33.7 9.8% 33.2 -0.1% 34.3 12.0% 864 62.3% 2,343 9.0% 500 50.1% 2,200 0.3% 32.5 7.3% 600 20.0% 2,300 4.5% 32.5 -3.0% 34.5 3.1% 375 7.1% 31.4 104% 24,522 0.2% 26,357 7.5% 24,500 0.1% 25,700 4.9% 24,500 100% 500 100% 1,857 -58.4% 3,054 64.4% 1,500 -66.4% 2,300 53.3% 1,665 7.2% 34.9 3.4% 34.4 3.7% 1,600 25.0% 1,600 0.0% 33.5 9.1% 33.5 0.7% 356 -36.7% 979 -9.8% 365 2.5% 1,033 5.6% 1,000 350 -37.8% -8% 1,100 10.0% 2,200 100% 2,625 175% 1,600 100% 100% 100% 33.5 33.5 19,889 1.0% 20,402 2.6% 20,000 1.6% 20,500 2.5% 20,000 100% 350 100% 1,000 100% 100% EFTA01476349

11,968 0.8% 12,615 5.4% 12,100 1.9% 12,500 3.3% 12,100 100% EFTA01476350

US Equity Insights 20 November 2015 Page 8 Deutsche Bank Securities Inc. Figure 12: S&P DPS Model by sector 2005 S&P 500 DPS (historical index) S&P 500 DPS (current constituents) Sector ($ billions) Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecommunication Services Utilities S&P 500 S&P 500 ex. Financials Financials and Tech S&P 500 ex. Financials and Tech S&P 500 Banks Source: Deutsche Bank, IBES DB US Equity Strategy Dividends 2006 2007 2008 2009 2010 2011 2012 2013 Payout Ratio (%) 2014 2007 2008 2009 2010 2011 2012 2013 2014 2015 $22.21 $24.89 $27.73 $28.38 $22.41 $22.73 $26.43 $31.24 $34.99 $39.44 33% 43% 37% 27% 27% 30% 32% 33% $23.24 $26.02 $29.40 $28.31 $22.48 $23.86 $27.13 $31.44 $35.78 $38.31 31% 39% 35% 27% 27% 30% 32% 33% $41 9.9 21.6 15.9 48.0 19.7 22.7 10.3 6.5 10.1 11.6 EFTA01476351

12.2 24.5 18.5 54.2 22.0 25.4 12.2 7.8 11.3 12.5 66.5 35.3 13.4 33.1 20.6 61.2 24.1 28.0 14.9 7.8 15.9 13.0 76.1 38.8 13.9 30.8 22.3 54.5 26.0 29.5 16.6 8.1 16.9 13.5 71.1 32.9 12.8 29.9 22.6 20.4 24.1 24.0 17.6 6.1 17.7 14.2 38.0 16.1 32.5 24.4 20.7 EFTA01476352

30.0 23.7 20.4 7.3 18.7 15.1 41.1 19.0 35.4 27.7 29.9 30.1 27.4 25.1 9.1 20.1 16.2 55.1 13.4 22.5 37.7 31.4 36.7 37.4 30.5 33.5 10.4 20.1 18.1 70.3 13.3 26.4 41.2 35.8 44.6 36.3 33.6 48.0 12.5 19.1 19.1 7% $44 7% 34% 35% 31.5 26% 34% 26% 22% 23% 25% 27% 31% 34.6 10% 38.1 10% 30% 31% 44.0 54% 46% 43% 44% 45% 48% 49% 51% 45.3 3% 47.3 4% 53% 54% 34.6 17% 16% 38% 26% 21% 26% 31% 31% 29.3 -15% 23.4 -20% 65% 45% 51.9 43% -274% 36% 16% 23% 23% 24% 27% 58.9 13% 66.7 13% 27% 29% 37.7 29% 30% 27% 30% 27% 33% 31% 28% 44.8 19% 49.5 10% 29% 30% 37.9 33% 39% 46% 32% 31% 32% 33% 33% 39.1 3% 40.9 5% 34% 35% 50.3 12% 14% 17% 13% 14% 18% 25% 24% 60.8 21% 69.3 14% 27% 29% EFTA01476353

12.1 32% 39% 47% 29% 29% 36% 41% 37% 11.8 -3% 12.0 2% 39% 37% 21.5 60% 63% 81% 81% 90% 84% 76% 70% 23.5 19.6 50% 50% 53% 53% 55% 61% 63% 59% 20.7 9% 23.7 1% 6% 21.7 5% 70% 73% 62% 63% 176.3 200.7 232.1 232.2 189.4 208.9 239.9 278.4 316.6 341.2 31% 39% 35% 27% 27% 30% 32% 33% 368.7 8% 392.7 6% 34% 35% 128.3 146.5 170.9 177.7 169.0 188.2 210.0 241.6 272.0 289.3 28% 38% 39% 30% 30% 32% 34% 35% 309.9 7% 326.0 5% 37% 37% 58.3 92.6 102.3 29% 70% 23% 15% 18% 20% 24% 26% 119.6 17% 136.0 14% 27% 29% 118.0 134.3 156.0 161.1 151.4 167.8 184.9 208.1 224.0 239.0 31% 47% 46% 36% 35% 37% 37% 38% 249.1 4% 256.7 3% 41% 40% 19.0 72% NM NM 7% 24% 20% 21% 28% 23.3 22% 27.4 18% 25% 28% 31.7 5.3 3.7 16.2 Dividends Y/Y 2016 Y/Y Payout (%) 2015 2016 Figure 13: S&P fair valuation by sector — we still see 5% downside to Energy Market Value ($bn) Consumer Discretionary Consumer Staples Energy Financials Banks Health Care Industrials Information Technology Materials Telecom Utilities S&P 500 ($ bn) S&P 500 Index ($/sh) Source: Deutsche Bank, IBES 2,433 1,762 1,281 3,044 1,127 2,628 1,930 3,939 543 423 EFTA01476354

526 18,508 2081.24 17.5 Current 2015 PE 21.1 20.6 28.5 14.0 12.1 17.0 16.8 17.5 17.9 12.6 15.7 2015E Earnings ($bn) 115.5 85.5 45.0 218.0 93.2 154.5 115.0 225.0 30.3 33.5 33.5 1055.7 119.0 Normal Ratio 100% 100% 178% 100% 100% 98% 98% 100% 104% 100% 100% 102.9% 103% Normal 2015E EFTA01476355

Earnings 115.5 85.5 80.0 218.0 93.2 151.5 112.2 225.0 31.4 33.5 33.5 1086.0 122.0 Accounting Quality Adjustment -10% -10% -10% -10% -10% -10% -10% -10% -10% -10% -10% -10% -10% Fully Adjusted Earnings 103.9 77.0 72.0 196.2 83.9 136.4 101.0 202.5 28.3 30.2 30.1 977.4 109.8 Real CoE 5.25% 5.00% 6.25% EFTA01476356

6.25% 6.50% 5.25% 5.75% 5.50% 6.25% 5.00% 5.00% 5.58% 5.50% Steady State Value 1,979 1,539 1,152 3,139 1,290 2,597 1,756 3,682 453 603 602 17,502 1996.4 Growth Premium 10% 5% 0% -5% -5% 10% 0% 5% 0% -15% 0% 3% 0% 2015 Start Fair Value ($bn) 2,177 1,616 1,152 2,982 1,226 2,857 1,756 EFTA01476357

3,866 453 513 602 17,974 1996.4 2015E Dividend Yield 1.4% 2.6% 2.3% 1.9% 2.1% 1.7% 2.0% 1.5% 2.2% 5.5% 3.9% 2.0% 2.0% 2015 End Fair Value ($bn) 2,304 1,688 1,221 3,171 1,305 3,015 1,857 4,096 480 520 620 18,972 2106.8 2015 End Fair Value PE 20.0 19.7 27.1 14.5 14.0 19.5 16.1 18.2 15.8 15.5 EFTA01476358

18.5 17.7 2015 end Upside -5% -4% -5% 4% 16% 15% -4% 4% -12% 23% 18% 2.5% 1.2% EFTA01476359

20 November 2015 US Equity Insights 2015 did not have healthy underlying broad based revenue or EPS growth ex oil and dollar S&P sales and operating EPS growth was broadly weak in 2015. Weakness extended beyond commodity producers and FX drags at multinationals. A surge in airline profits masked a significant decline in profits at Industrial Capital Goods. Revenue was flat at Financials with EPS growth from less litigation than 2014. No growth at Consumer Staples despite lower input costs. Good growth at Retailers, but disappointing given the macro tailwinds owing to fierce price competition. Strong at auto, but home builders disappointed. The strongest growth was at Health Care and consumer oriented Tech firms. Corporate tech spending on equip. and software remains very sluggish and chip makers were flattish on earnings given slow PC, handset and weak industrial end markets. Ex. Energy, Financials, HC and AAPL, AMZN & GOOG 2015 S&P EPS growth is —2.5%; this is the underlying trend with —4% FX drag that should fall to —1.5%. Figure 14: S&P Industrials ex. Defense sales growth vs. Core capital goods shipments & Mfg ISM -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% y/y growth was high single-digit y/y sales growth was low single-digit in 2014 when ISM was >55. 1H sales growth is negative on lower Mfg ISM. 34.0 38.0 42.0 46.0 50.0 54.0 58.0 62.0 EFTA01476360

Industrials ex. Def sales growth (y/y, lhs) Mfg ISM (3m avg, rhs) Source: Census, ISM, IBES, Deutsche Bank Core Capital Goods Shipment (3m avg, y/y) New Orders Source: Census, Deutsche Bank Shipments Figure 15: Core non-defense capital goods new orders & shipments -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% Non defense Capital Goods ex. Aircraft (Core) 3mo average y/y y/y growth was double-digit y/y growth has slowed down since late 2014, and new orders 3mo average started to decline in 202015 -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% 20% Figure 16: Industrials ex. Airlines / Defense sales growth -20% -16% -12% -8% -4% 0% 4% 8% 12% 16% 20% EFTA01476361

24% Sales growth Y/Y -20% -16% -12% -8% -4% 0% 4% 8% 12% 16% 20% 24% Industrials Source: IBES, Deutsche Bank Industrials ex. Defense Industrials ex. Airlines Figure 17: Tech ex. AAPL & GOOG sales growth -16% -12% -8% -4% 0% 4% 8% 12% 16% 20% 24% Sales growth Y/Y -16% -12% -8% -4% 0% 4% 8% 12% 16% 20% 24% Information Technology Source: IBES, Deutsche Bank Tech ex. AAPL & GOOG Deutsche Bank Securities Inc. Page 9 2006 1006 EFTA01476362

3006 1007 3007 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3012 1013 3013 1014 3Q14 1Q15 3Q15 2007 2008 2009 2010 2011 2012 2013 2014 2015 1Q06 3Q06 1007 3007 1008 3Q08 1Q09 3Q09 1010 3010 1011 3011 1Q12 3Q12 1013 3013 1014 3Q14 1Q15 3Q15 2000 2001 2002 EFTA01476363

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 EFTA01476364

20 November 2015 US Equity Insights Figure 18: S&P EPS growth ex Energy, Fin., HC and AAPL, AMZN & GOOG EPS growth y/y -60% -50% -40% -30% -20% -10% 0% 10% 20% 30% Energy Financials Healthcare AAPL, AMZN & GOOG 2015 btm-up Source: Gartner, Deutsche Bank (October 2015) 8.2% 0.9% 7.9% 2.5% -12% -10% -8% -6% -4% -2% 0% 2% 4% 6% S&P S&P ex all of above 2016 btm-up Source: IBES, Deutsche Bank 2.5% 1.3% 3.1% 3.2% 3.4% Figure 19: Global enterprise tech spending growth forecast by region -3.0% 2014 N. America 2015E 2016E EFTA01476365

W. Europe 2017E Japan 2018E ROW 2019E Global Figure 20: Linear Technology (LLTC, broad-based Industrial player) Industrial bookings, weak through 1H16 100 110 120 130 140 150 160 170 180 -10% -5% 0% 5% 10% 15% 20% Figure 21: Aggregate Industrial revenues (DB US semiconductor coverage) expected to rebound after 1Q16 2500 2750 3000 3250 3500 3750 4000 Industrial bookings (m) Y/Y -10% 0% 10% 20% 30% 40% 50% Industrial revenues ($m) Source: Linear Technology, Deutsche Bank estimates Source: Company data, Deutsche Bank estimates Y/Y Figure 22: S&P 500 trailing 4-qtr EPS growth: 1960 — 3Q2015 -40% EFTA01476366

-30% -20% -10% 0% 10% 20% 30% 40% Est 1960-2014 CAGR: 6.7% Aggressive Fed tightening slowed GDP growth and weighed on S&P EPS Weak oil and strong $ weighed on S&P EPS Weak oil and Russian default weighed on S&P EPS Recession S&P 500 Trailing 4-qtr EPS (y/y) Source: IBES, Compustat, Deutsche Bank CAGR avg. Page 10 Deutsche Bank Securities Inc. 1960 1962 1964 1966 1968 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 EFTA01476367

2011) 2012 2014 EFTA01476368

20 November 2015 US Equity Insights Figure 23: S&P Sales growth lags US GDP growth_ -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% y/y % chg Correl: 0.69 1977-79 GDP: 12.1% Sales: 17.1% 1985-89 GDP: 6.8% Sales: 5.3% 2H1993-99 GDP: 5.9% Sales: 7.9% Recession Avg 1970-1990 GDP: 8.7% Sales: 9.7% Source: S&P, BEA, Deutsche Bank Nominal GDP 2004-07 GDP: 5.6% Sales: 9.2% 2H2011-2H14 GDP: 4.0% Sales: 3.0% S&P 500 Sales Avg 1991-now GDP: 4.5% Sales: 4.9% Recession Source: BEA, Deutsche Bank Real GDP Real Exports of Goods -20% -15% -10% -5% 0% 5% EFTA01476369

10% 15% 20% 25% 30% Figure 24: ... even though GDP growth was not particularly strong -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% y/y % chg 1992-99 GDP: 4.0% Exports: 8.0% 2003-07 GDP: 3.0% Exports: 7.8% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% Figure 25: Capex growth is key for healthier S&P Sales growth y/y % chg 1967 capex slowdown 1985-87 capex slowdown -20% -15% -10% -5% 0% 5% 10% 15% 20% EFTA01476370

25% FY2015 estimates 1962-69 Domestic infrastructure GDP: 4.7% Capex: 8.7% Recession Avg 1951-1970 GDP: 3.7% Capex: 5.0% Source: BEA, Deutsche Bank 1976-79 Oil boom GDP: 4.3% Capex:10.4% 1992-99 Productivity driven IT capex boom GDP: 4.0% Capex: 10.3% Real GDP Avg 1971-1990 GDP: 3.2% Capex: 5.7% 2003-07 Asia / export/ commodity capex GDP: 3.0% Capex: 6.3% Capex (Equip. + IPP) y/y % chg Avg 1991-2014 GDP: 2.6% Capex: 5.3% -20% -15% -10% -5% 0% 5% 10% 15% 20% 25% Figure 26: Spenders of capex (S&P 500 capex by sectors) Healthcare 4% Financials 5% EFTA01476371

Telecom 6% Energy 28% Figure 27: Receivers of capex (GDP accounts — US capex by type) 2014 27% Energysensitive Ag/Mining/ Const. Equip. 6% Tech 12% $711bn Cons. Staples 6% Materials 4% Cons. Disc. 13% Utilities 12% Source: Company reports, Deutsche Bank Source: BEA, Deutsche Bank Industrials 10% —54% S&P heavy industrial Industrial Equip. 13% $1,720bn Software 18% Transportation Equip. 16% Other IPP 5% R&D 17% 22% Intangibles Other Equip 7% Medical Equip. 5% Comm. Equip. 6% EFTA01476372

Computers 5% Other IT 2% 31% of capex = Tech & Telecom Deutsche Bank Securities Inc. Page 11 1950 1954 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 2014 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 EFTA01476373

2008 2010 2012 2014 EFTA01476374

20 November 2015 US Equity Insights Reiterating OW on Healthcare Healthcare is 15.3% of US GDP (22.4% of PCE). The largest piece of this is healthcare services as rendered by healthcare professionals, hospitals and other facilities. The smaller but even faster growing part of Healthcare is drugs, devices and equipment. As is typical for the S&P 500, the Health Care sector is more exposed to manufacturing products than delivering services. We believe growth in healthcare products will stay strong owing to an aging population and increasing efforts to treat conditions with drugs and maximize the productivity of scarce healthcare labor with as many tools and conveniences as conceivable. We believe S&P 500 Biotech, Pharma, Devices, Equipment, Supplies, Tech and Tools sit in the sweet spot of these trends. We remain cautious on Managed Care and other HC services and facilities. Given superior growth, the sector normally trades at a 10% premium to the S&P, so the current discount is rare. We see nearly 4pts of PE upside as we believe the sector should trade at 18-20x fwd PE or —20x trailing, if the 10yr Treasury yield doesn't significantly exceed 3%. Currently, HC is trading at a 15.5-16x fwd PE, below S&P's 16.7x. HC trailing PE is already as undemanding at it was in 1993 during the worst of the Hillary Care sell-off back then as a 13-14 PE with 6-7% 10yr Tsy yields is more demanding than a 14-15 trailing PE with 2-2.5% 10yr Tsy yields. So valuations are similar or even less demanding now than during the bottom of the 1993 sell- off. Moreover in 1993, Democrats held a Congress majority and when Republicans took it in 1994, Hillary Care stopped. Today, Republicans control Congress. We expect 6%+ sales growth and —7% EPS growth from S&P Healthcare next year, and it has best sales and EPS estimates revision trends of any major sector. We also like its low cyclicality and strong balance sheets. As the biggest and fastest growing part of US GDP and household consumption, HC remains our most favored sector. Figure 28: S&P Healthcare Trailing PE as low as during worst of Hillary Care sell-off in 1993 10 EFTA01476375

15 20 25 30 35 40 5 Figure 29: 10yr Treasury yields 6-7% in 1993 sell-off vs. 2-2.5% today 10 0 1 2 3 4 5 6 7 8 9 Source: Clarifi/Compustat, Deutsche Bank Source: Bloomberg Finance LP, Deutsche Bank Page 12 Deutsche Bank Securities Inc. 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 1990 EFTA01476376

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 EFTA01476377

20 November 2015 US Equity Insights Figure 30: Relative price performance during Clinton healthcare initiatives in the 1992-1994 election -20% 0% 20% 40% 60% 80% 100% S&P 500 S&P Healthcare Nov 1992: Clinton Elected Jan 1993: Hillarycare task force created Figure 31: Hit to Health Care since Hillary Clinton's tweet on Sept 21 (relative price performance) Sept 1994: Sen Majority leader Mitchell declares Clinton initiatives dead -16.0% -14.0% -12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% S&P 500 S&P Healthcare Sept 21: Hillary Tweets about drug prices Source: IBES, Deutsche Bank Source: IBES, Deutsche Bank Reiterating UW on Energy We continue to question the still highly elevated valuations at Energy stocks. YTD oil prices are down nearly $50 y/y, a huge headwind to Energy profits. Every $5/- barrel decline in oil prices reduces S&P annual net income by —$7.5bn or nearly $1 EPS, as it hits S&P Energy profits by 10%, even as Energy companies cut costs aggressively. We think Energy stocks are overvalued. We assume normalized oil prices of $65-70 (40% gain vs. —$50 YTD average), but likely not achieved until 2017. For EFTA01476378

normalized Energy earnings, we forecast $80bn on improved costs (60% gain in profits on 40% gain in oil price), but again, not until 2017. However, at Energy's current —$1.3tr market cap, the market-implied normalized Energy earnings is $90bn in 2016, if a fair forward PE on normalized earnings is assumed to be 15x. In fact, history suggests 13-15x fair fwd PE on normalized earnings is more appropriate, in which case the market is implying an even higher normalized Energy earnings of $90-100bn in 2016. Note: we are not applying 13-15x on either our forward Energy earnings or bottom-up consensus; we are using a 13-15x fwd 12- month PE as suggested by history solely for the purpose of implying the level of Energy earnings that the market currently expects to be achieved by 2016. $90bn+ of normalized earnings would imply that either an 80% gain in profits is required on 40% gain in oil price (to $65-70) for the entire sector, or that the market assumes oil prices will normalize above $70. Achieving $90bn+ in profits even with $70/bbl oil will be challenging given: 1) oil service profits staying very weak given the capacity rationalization likely needed to get oil prices to $70/bbl, 2) natural gas prices that are likely to stay very depressed for a long time, 3) oil refining margins would suffer a big hit should oil prices rise to $70/- bbl without a large WTI to Brent price spread. We think a fair intrinsic value for Energy at YE2015 is —$1.2tr or 25x our actual (but sub-normal) estimate for 2016 Energy earnings of $52bn. We see —5% downside to Energy stocks into YE2015, unless oil prices quickly rally to —$60 or higher. Credit markets also support our cautious stance on Energy, as a comparison of equity risk premium (EPS yield — 10 TIPS yld) vs. credit risk spreads by sector reveals that Energy equities are expensive vs. the sector's debt. We think it is too early to rotate into Energy equities and we maintain our UW on the sector. Deutsche Bank Securities Inc. Page 13 7/1/2015 7/8/2015 7/15/2015 EFTA01476379

7/22/2015 7/29/2015 8/5/2015 8/12/2015 8/19/2015 8/26/2015 9/2/2015 9/9/2015 9/16/2015 9/23/2015 9/30/2015 10/7/2015 10/14/2015 10/21/2015 EFTA01476380

20 November 2015 US Equity Insights Stronger revenue growth is key to achieving healthy S&P EPS growth in 2016 Strong revenue growth at Health Care, better capex on productivity enhancers like tech equip/software, slower but still strong revenue growth at consumer oriented big cap Tech are key to our 4% S&P sales growth, 1% share shrink and flat net margin estimates for 2016. Some cyclically risky sectors like Auto, Airlines, Chemicals & Semiconductors must avoid losing any earnings power. Figure 32: S&P Quarterly EPS growth breakdown -2% 0% 2% 4% 6% 8% 10% 12% Average for the last 15 quarters (S&P 500): EPS growth: 6.2% Net income growth: 4.8% EPS growth from share buybacks = 1.4% Qtrly Net Income Growth y/y Source: Deutsche Bank, IBES EPS growth from share buybacks (earnings weighted) Page 14 Deutsche Bank Securities Inc. 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 EFTA01476381

20 November 2015 US Equity Insights Margin expansion is possible, but upside counterbalanced by downside risk Fierce price competition at Retailers, more global competition at Industrials and the political threats at Health Care pose some sales risk, but mostly margin risk. There is also tax rate risk. Many are concerned about wage pressure on margins, but this is not a major risk for S&P firms. However, a tighter than expected labor market could lead to more Fed hikes than expected and thus EPS risks via dollar, oil or PE risk via credit market or higher Tsy yids. Fed hikes are a small boost to S&P EPS. Figure 33: S&P trailing 4qtr net margins 12% 10% 8% 6% 4% Cyclical but not mean reverting 2% 0% 2% 0% Figure 34: S&P quarterly net margins 12% 10% 8% 6% 4% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% Recession S&P 500 GAAP Net Margins Non-GAAP Net Margins Pro forma Net Margins Source: Deutsche Bank, Compustat, IBES Source: Deutsche Bank, IBES GAAP Net Margins EFTA01476382

-8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% Figure 35: Labor participation in decline Figure 36: Fed hikes yet to begin despite rising wage pressures 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) 0% 2% 4% 6% 8% 10% 0% 1% 2% 3% 4% 5% Recession Fed Funds Target (lhs) Avg. hourly earnings (Production and non-supervisory, y/y, rhs) Avg. hourly earnings (All employees, y/y, rhs) Source: BLS, FRB, Deutsche Bank Deutsche Bank Securities Inc. Page 15 1960 1963 EFTA01476383

1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 2011 2014 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 1985 1988 1991 1994 1997 2000 2003 2006 2009 EFTA01476384

2012 2015 1Q05 3Q05 1Q06 3Q06 1Q07 3Q07 1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3012 1013 3013 1014 3014 1015 3015 EFTA01476385

20 November 2015 US Equity Insights Figure 37: Large vs. small companies' compensation $10 $15 $20 $25 $30 $35 $40 $45 $50 $0 $5 Annual Quarterly 150% 155% 160% 165% 170% 175% 180% 185% Ratio Pvt cos. with 1-99 employees total comp. $/hr Source: BLS, Deutsche Bank Pvt cos. with 500+ employees total comp. $/hr Figure 38: S&P industry-level returns on interest rate changes -30% -20% -10% 0% 10% 20% 30% Correlation of 3m S&P industry total returns vs. 3m chg in real 10yr yield (2003-2014) Source: FRB, IBES, Deutsche Bank Figure 39: Higher overnight rates: Financials industries benefit spectrum Most Least Online Brokers Trust Banks Asset Managers Source: Deutsche Bank Consumer Finance Diversified Banks Investment Banks Regional Banks Thrifts & Mortgage Finance EFTA01476386

Exchanges P&C Insurance Life Insurance REITs Page 16 Deutsche Bank Securities Inc. Commerical Banks Distributors Div Financial Svcs Containers & Packaging Airlines Air Freight & Logistics Div Consumer Svcs Road & Rail Consumer Finance Construction Materials Commercial Svcs & Suppl Auto Components Trading Co & Distributors Aerospace & Defense Specialty Retail Electr Equip & Instru Industrial Conglomerates Household Products Automobiles Life Sci Tools & Svcs Semi & Semi Equip Office Electronics Construction & Engineering Building Products Food Products Real Estate Inv & Develop Media Health Care Technology Electrical Equipment Capital Markters Textiles & Apparel Paper & Forest Products Insurance Communication Equipment Household Durables Food & Staples Retailing Biotechnology Software Multi-line Retail Personal Products Leisure Equip & Prod Health Care Equip & Suppl Machinery Oil, Gas & Cons Fuels Health Care Providers & Svcs EFTA01476387

Thrifts & Mortgage Finance Energy Epqt & Services Internet Software & Services Chemicals Hotels, Resturants & Leisure Pharmaceuticals REITs IT Services Wireless Telecom Services DISC Beverages Tech Hardware, Storage & Peripherals Internet Retail Diversified Telcom Services Tobacco Gas Utlities Power/Renewable Elec. Producers Metals & Mining Multi-Utilities Electric Utlities Q1.90 Q1.94 Q1.98 Q1.02 Q1.03 Q1.04 Q1.05 Q1.06 Q1.07 Q1.08 Q1.09 Q1.10 Q1.11 Q1.12 Q1.13 Q1.14 Q1.15 EFTA01476388

20 November 2015 US Equity Insights 5% delineates healthy from unhealthy S&P EPS growth and supports an 18 PE Our 1 year target of 18x trailing S&P EPS uses a 5.5% real and 7.5% nominal CoE. EPS is retained, so real EPS g must = real CoE - div yld to justify PE = 1/real CoE. Figure 40: S&P fair valuation & real CoE by sector Market Value ($bn) Consumer Discretionary Consumer Staples Energy Financials Banks Health Care Industrials Information Technology Materials Telecom Utilities S&P 500 ($ bn) S&P 500 Index ($/sh) 2,433 1,762 1,281 3,044 1,127 2,628 1,930 3,939 543 423 526 18,508 2081.24 Source: Deutsche Bank, IBES 17.5 Current 2015 PE 21.1 20.6 28.5 14.0 12.1 17.0 16.8 17.5 EFTA01476389

17.9 12.6 15.7 2015E Earnings ($bn) 115.5 85.5 45.0 218.0 93.2 154.5 115.0 225.0 30.3 33.5 33.5 1055.7 119.0 Normal Ratio 100% 100% 178% 100% 100% 98% 98% 100% 104% 100% 100% 102.9% 103% Normal 2015E Earnings 115.5 85.5 80.0 218.0 93.2 151.5 112.2 225.0 31.4 33.5 33.5 1086.0 122.0 Accounting EFTA01476390

Quality Adjustment -10% -10% -10% -10% -10% -10% -10% -10% -10% -10% -10% -10% -10% Fully Adjusted Earnings 103.9 77.0 72.0 196.2 83.9 136.4 101.0 202.5 28.3 30.2 30.1 977.4 109.8 Real CoE 5.25% 5.00% 6.25% 6.25% 6.50% 5.25% 5.75% 5.50% 6.25% 5.00% 5.00% 5.58% 5.50% Steady State Value 1,979 1,539 EFTA01476391

1,152 3,139 1,290 2,597 1,756 3,682 453 603 602 17,502 1996.4 Growth Premium 10% 5% 0% -5% -5% 10% 0% 5% 0% -15% 0% 3% 0% 2015 Start Fair Value ($bn) 2,177 1,616 1,152 2,982 1,226 2,857 1,756 3,866 453 513 602 17,974 1996.4 2015E Dividend Yield 1.4% 2.6% 2.3% 1.9% 2.1% 1.7% EFTA01476392

2.0% 1.5% 2.2% 5.5% 3.9% 2.0% 2.0% 2015 End Fair Value ($bn) 2,304 1,688 1,221 3,171 1,305 3,015 1,857 4,096 480 520 620 18,972 2106.8 2015 End Fair Value PE 20.0 19.7 27.1 14.5 14.0 19.5 16.1 18.2 15.8 15.5 18.5 17.7 2015 end Upside -5% -4% -5% 4% 16% 15% -4% 4% -12% 23% EFTA01476393

18% 2.5% 1.2% Figure 41: S&P Trailing PE vs implied equity risk premium 10 15 20 25 30 35 0 5 Recession Implied ERP (rhs) Avg ERP ex 1975-82 = 3.5% Source: Deutsche Bank, S&P, IBES Trailing PE (lhs) Avg ERP = 4% Avg PE = 15.9 Overstated EPS from inflation distortions Low offered ERP contributes to crash Long-term growth optimism Return to normal 0% 2% 4% 6% 8% 10% 12% Deutsche Bank Securities Inc. Page 17 1960 1963 1966 1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 EFTA01476394

2005 2008 2011 2014 EFTA01476395

20 November 2015 US Equity Insights S&P intrinsic valuation model An EPS discount model Our intrinsic valuation model combines our detailed S&P EPS analysis with our intrinsic valuation expertise. We did this by creating a single-stage earnings discount model so that we could intrinsically value the S&P 500 based upon our EPS estimates. Our EPS discount model is consistent with the principles underlying a dividend discount model (DDM) or a discounted cash flow (DCF) model, but the direct input is EPS and not DPS. Our full valuation model, shown on page 21, can be daunting upon first glance, but it is actually very simple at its core. The model simply capitalizes S&P 500 EPS. S&P 500 value = normalized EPS / a fair long-term real return on S&P 500 ownership While our model can be reduced to the basic formula above, the full version of our model allows us to decompose and more closely examine our underlying assumptions. Examining our assumptions piece by piece helps us to fully consider current macro conditions and make more meaningful comparisons to history. It also allows us to better compare our assumptions to market implied expectations and run sensitivity tests. We validate the mechanics of our model by reconciling it to a dividend growth model, as well as a DCF and economic profit valuation model. This helps ensure correct math and provides us additional frameworks of thought to assess our assumptions. A simple version of our model before introducing the full version The simplest version of our model is just like a steady-state terminal value calculation in a DCF model. We set DPS equals to EPS and assume long-term growth is only inflation. Figure 42: Capitalize steady state earnings at the real cost of equity Deutsche Bank's 2015E S&P 500 EPS DB's "normal 2015E" S&P 500 EPS "Normal 2015E" EPS / 2015E EPS Accounting quality adjustment to pro forma EPS Normal 2015E S&P 500 EPS fair to capitalize Fair long-term return on S&P 500 index: + Long-term real risk free interest rate + Long-term fair S&P 500 equity risk premium = Fair real return on S&P 500 ownership + Long-term inflation forecast EFTA01476396

= Nominal S&P 500 cost of equity S&P 500 intrinsic value at 2015 start = Adj. normal EPS / (nominal CoE - inflation) S&P 500 intrinsic value at 2014 end = Year start value * (1 + nominal CoE - div. yld.) Source: Deutsche Bank $119.00 $122.00 103% -$12.00 $110.00 1.50% 4.00% 5.50% 2.00% 7.50% 2000 2109 We capitalize our cyclically normalized and accounting quality adjusted pro forma S&P 500 EPS estimate at the real cost of equity. This assumes that there will be no long-term S&P 500 economic profit growth or deterioration. We try to stay disciplined about our real cost of equity assumption, usually 5.5-6.5% We set our 12-month S&P 500 target using a fair intrinsic value model. Page 18 Deutsche Bank Securities Inc. EFTA01476397

20 November 2015 US Equity Insights The drivers of our full S&P 500 intrinsic value model Most of our valuation model inputs are fairly straightforward and typical of any intrinsic value model; such as interest rates, risk premiums, retained earnings ratio, return on reinvestment, etc. But our normalized EPS input tends to require additional explanation. Understanding our normalized EPS estimates We assess EPS normality or sustainability by evaluating the ability of current year EPS to grow at a healthy rate over the next several years. If EPS cannot grow at a healthy rate, which we approximate as the nominal cost of equity less the expected dividend yield, then current enough for EPS to merely grow; must grow at a rate that yields retained EPS. Let us explain further using our S&P 500 S&P 500 EPS is $119, we think $122 better 2015. Apart from Energy and Managed Health Care, represent normal mid-cycle earning for most in 2015 and parts of Health Care and some Managed Health Care (HMOs) profits could drift limits to premium hikes and the mix of new enrollees weighted existing conditions. Our $122 normalized EPS estimate for improving profitability at Energy and weakness to come at HMOs. We consider our 2016E EPS of $125 to be roughly $2 shy of fully normalized mid-cycle earnings. Comparing EPS growth expected over the next several years to a value neutral hurdle rate is how we capture the magnitude of current cyclical EPS distortions and the time it should take to return to healthy long-term growth in our normalized EPS estimates. Why an accounting quality adjustment to normalized EPS? We deduct $12 from our normalized S&P 500 EPS estimate for accounting quality. Pro year EPS must be considered cyclically peaked. It is not in order to be considered normal or sustainable, EPS a return equal to the cost of equity on any additionally EPS estimates. Although our 2015E represents normalized S&P 500 EPS for we think 2015 earnings generally sectors. We think Energy is under earnings other industries over earnings. We think lower on higher industry taxes, towards elderly or with pre- for 2015 captures the outlook EFTA01476398

forma or non-GAAP EPS tends to overstate and GAAP EPS tends to understate true EPS. A good measure of EPS should capture what FCF per share would be when no investments are made for growth. At steady-state EPS = FCF/sh = DPS. An EPS discount model versus a dividend discount model explained In a dividend growth or free cash flow discount model, future flows can be discounted directly because earlier period flows should be reduced by investments that fed growth. However, earnings growth cannot be discounted directly because earnings growth fails to account for what portion of prior period earnings were retained to feed growth. Thus, an EPS discount model must separate EPS growth into two parts: 1) growth from reinvestment at returns equal to the cost of equity, 2) growth from returns in excess of the cost of equity or economic profit growth. Our EPS discount model calculates value by taking the present value of growth in economic profits (not ordinary profits) and adds this to the capitalized value of current normalized EPS. DCF: Value = PV of all future free cash flows DDM: Value = PV of all future dividends Economic Profit Model: Value = book value plus all future economic profits Incremental EP Model: Value = capitalized EPS plus all future economic profit growth Once economic profit growth stops, equity value is simply EPS capitalized at the real cost of equity. This is because EPS growth only adds to steady-state value (EPS/real Deutsche Bank Securities Inc. Page 19 We reduce our pro forma normalized EPS est. to ensure that it represents steady-state FCF per share and DPS. Our normalized S&P 500 EPS estimate is the main driver of our intrinsic value model. The mechanics of our model are equivalent to a DDM. Intrinsic value drivers: 1) Normalized EPS 2) Accounting adjustments 3) Long-term real interest rate 4) Equity risk premium 5) Growth premium Inflation affects EPS quality, and the risk premium. EFTA01476399

20 November 2015 US Equity Insights CoE), when EPS growth is greater than the retention ratio times the real cost of equity. EPS growth that does not exceed this threshold is merely a dividend substitute. Our full model allows for the consideration of economic profit growth To really understand our valuation model, and for that matter our macro minded intrinsic value driven investment strategy, it is very important to understand the concepts of normalized earnings and economic profit growth potential. Whenever we think about the worth of a business, we ask ourselves three questions: 1) What are its normalized and accounting quality adjusted earnings? 2) What is a fair rate at which to capitalize such normalized earnings? 3) Can the business replicate itself and increase its economic profits? For the S&P 500 overall, the key investor debate is usually about normalized EPS and a fair capitalization rate. Economic profit growth potential (or decline) is usually more of an industry or company specific debate. Right now, the market seems dismissive of long-term economic profit growth potential for the vast majority of big cap stocks. This is a bit conservative relative to long-term market history, but contrasts sharply from the late 1990s. This may provide the S&P 500 with additional upside over the long-term. But over the shorter-term, overall market and relative sector performance will likely be a function of 2016 & 2017 EPS outlooks and actual results and the course of interest rate. Normalized vs. current EPS is a crucial PE driver for cyclical companies. Often it is the perception of normal EPS that drives short-term performance, but actual EPS through the full cycle tends to drive most of long-term performance. Confidence or uncertainty in the normalized EPS estimate, as well as in every intrinsic value driver estimate, affects the fair PE. Confidence in normalized S&P 500 EPS has risen from very low levels over the past few years as Financial profits have improved and now that Energy profits declined due to the collapse in highly elevated oil prices. But what is a fair cost of equity? Valuing normal EPS and estimating economic profits requires a cost of equity estimate. The cost of equity is the long-term risk free interest rate plus an equity risk premium. EFTA01476400

Today's long-term real risk free interest rate is among the lowest in history, at 0.500.75% 10yr TIPS, versus a 2-3% norm. Our intrinsic value model and target PE assume that real interest rates stay below the low end of their normal range. Because cyclical fluctuations in rates and risk premiums are opposite in direction, we think it is good practice to estimate a normalized interest rate and add to it a normalized risk premium. The real cost of equity assumed in our intrinsic valuation model is 5.5%. This assumes a 1.5% long-term real interest rate (10yr TIPS yield) and a 4% ERP. This risk premium is in-line with the upper range of the 3-4% typically observed on both an ex. ante and ex. post long-term basis. We use the upper end of the normal ERP range given that we are using the lower end of the normal long-term real interest rate range and we do not want to deviate too much from a real cost of equity of 5.5%-6.5% (we have used 7% for short periods of severe risk) as this range best proxies most measures of long-term real returns on S&P 500 ownership. Focus on secular changes in interest rates. Real interest rates are far below their historical nom. This is likely attributable to both cyclical and also secular causes. Our full model details our assumptions and allows consideration of economic profit growth potential. Right now the market is focused on what are typically value investor debates. Perception of normal EPS tends to drive short-term performance, but actual EPS through the full cycle drives most of the market's longterm performance. Page 20 Deutsche Bank Securities Inc. EFTA01476401

US Equity Insights 20 November 2015 Deutsche Bank Securities Inc. Page 21 Figure 43: Our S&P 500 Intrinsic Valuation Model S&P 500 Capitalized EPS Valuation Deutsche Bank's 2015E S&P 500 EPS DB's "normal 2015E" S&P 500 EPS "Normal 2015E" EPS / 2015E EPS Accounting quality adjustment to pro forma EPS Normal 2015E S&P 500 EPS fair to capitalize Key principle: steady-state value = normal EPS / real CoE S&P 500 EPS Capitalization Valuation Normal EPS / (real CoE - (EM/payout) - EM): S&P 500 intrinsic value at 2015 start S&P 500 intrinsic value at 2015 end Implied fair fwd PE in early 2015 on 2015E $119 EPS Implied fair trailing PE at 2015 end on 2015E $119 EPS Normal EPS / (real CoE-value added EPS growth) S&P 500 Dividend Discount Model S&P 500 Long-term EPS & DPS Growth $119 Deutsche Bank's 2015E S&P 500 DPS 2015E dividend payout ratio $122 DB's "normal 2015E" S&P 500 DPS 103% Normal dividend payout ratio -$12.00 EPS directed to net share repurchases Normal share repurchase payout ratio $110 Total payout of S&P 500 EPS Total payout rate S&P 500 DPS Discount Model Normal DPS / (nominal CoE - DPS growth): 2000 S&P 500 intrinsic value at 2015 start 2109 S&P 500 intrinsic value at 2015 end 16.8 17.7 2000 Implied fair forward yield on 2015E DPS of $41.0 Implied fair trailing yield on 2015E DPS of $41.0 DPS discount model using true DPS (all payout) $41.00 Deutsche Bank's 2015E S&P 500 aggregate ROE 34% 2014 end S&P 500 book value per share $41.00 DB's "normal 2015E" S&P 500 aggregate ROE 37% S&P 500 EPS retained for true reinvestment $26.50 Estimated ROE on reinvested S&P 500 EPS 24% Economic margin (EM) or ROE-CoE $67.50 Sources of long-term earnings growth: 61% + Long-term inflation forecast + Fair return on true reinvestment + Value added return on true reinvestment = Long-term earnings growth EFTA01476402