March 23, 2012

United States

US Equity Views

Portfolio Strategy Research

Today vs. 2007 Peak: Comparing earnings, growth and P/E multiples
We focus on how current valuation metrics compare with October 2007 when S&P 500 peaked at 1565 and what would need to change to lift the market by 11% to return to that level or push the index down 11% towards 1250. EPS today is 6% above prior peak ($97 vs. $91), but expected EPS growth rate has declined to 9% from 13% while the P/E multiple has compressed to 13x from 15x. Key changes: (1) Collapse in Financials EPS; (2) Compression in Industrials P/E multiple: (3) Plunge in Health Care expected EPS growth and multiple; offset by (4) growth in Tech EPS led by AAPL.
We still expect US GDP will grow at a below-trend pace in 2012
Our 2012 investment thesis has three parts: (1) US economy expands at a below-trend rate of 2.1% in 2012 and 2.2% in 2013; (2) P/E multiple is stable; and (3) EPS growth is modest at 3% to $100 in 2012 and 7% to $106 in 2013.
David J. Kostin
(212) 902-6781 david.kostin@gs.com Goldman, Sachs & Co.

Amanda Sneider, CFA

Some data points support our cautious view; others contradict it

Sales and earnings revisions remain negative across nearly all sectors. Oil and gas prices have risen sharply, curtailing spending. Equity mutual funds still lack inflows. Offsetting positives include better-than-expected macro data and central bank actions including LTRO and Fed stress test results.

(212) 357-9860 amanda.sneider@gs.com Goldman, Sachs & Co.

Stuart Kaiser, CFA

(212) 357-6308 stuart.kaiser@gs.com Goldman, Sachs & Co.

Downside risks: Falling profit margins; low Financials ROE

We are reluctant to forecast a higher multiple when margins have begun to fall from peak levels. Low Financials ROE represents a market headwind.

Peter Lewis
(212) 902-9693 peter.lewis@gs.com Goldman, Sachs & Co.

Ben Snider

Upside risks: Faster economic growth; reversal of net money flow;

Acceleration in US GDP growth towards 2 - 3% for 2H 2012 would lead us to re-examine our investment framework. Evidence of asset re-allocation out of bonds and into equities would support a higher multiple for stocks. S&P 500 Earnings, EPS growth rate, valuation, and index level

(212) 357-1744 ben.snider@gs.com Goldman, Sachs & Co.

9-Oct-07 Earnings EPS (LTM) EPS (NTM) Expected Growth Valuation (NTM P/E) S&P 500 Index $91 103 12.5 % 15.2 X 1565

21-Mar-12 $97 106 9.4 % 13.2 X 1403

Change Level Percent $5 3 (3.1)pp (2.0)X (162) 6% 3 (25)% (13)% (10)%

Source: IDC, Compustat, FirstCall, I/B/E/S and Goldman Sachs Global ECS Research.

Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, 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. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc.

Goldman Sachs Global Economics, Commodities and Strategy Research

March 23, 2012

United States

A status report on our 2012 investment thesis

S&P 500 has advanced 12% YTD to 1400 and currently trades 5% above our mid-year 2012 target of 1325 and 11% higher than our year-end target of 1250. We based our investment thesis for US stocks at the start of 2012 on three assumptions: (1) stagnating US economy; (2) stagnating P/E multiple; and (3) modest earnings growth. A brief update on the three-part forecast: We continue to expect below-trend GDP growth of roughly 2% in 2012 although risks have tilted to the upside. Our valuation assumption of a static multiple has clearly not been correct as the forward P/E multiple has expanded by 9% from 12.7x to 13.2x based on bottom-up consensus EPS. Our top-down EPS estimates have remained unchanged at $100 in 2012 and $106 in 2013, reflecting 3% and 7% growth.

Exhibit 1: US GDP tracking below typical stagnation path

as of March 20, 2012
115

Exhibit 2: Path of forward P/E multiple during stagnation

as of February 29, 2012
180

110

Indexed GDP per capita

Stagnation starts (GDP = 100)

105

Average indexed GDP per capita in 93 stagnations Japan (1992-2003)

+ 1SD

160

Stagnation starts (P/E = 100)

Average indexed forward P/E in 17 OECD stagnations

18.8x

+1 SD

140

Indexed NTM P/E

120

100

100

14.1x 11.8x

95

80

90

US (2008-2013E)

- 1SD
60

Current US

9.3x Forecast -1 SD
Y+6

85

40
Y-2 Y-1 Y0 Y+1 Y+2 Y+3 Y+4 Y+5 Y+6 Y+7

Y-2

Y-1

Y0

Y+1

Y+2

Y+3

Y+4

Y+5

Stagnation year

Stagnation Year

Source: Barro-Ursua data and Goldman Sachs Global ECS Research.

Source: Compustat, I/B/E/S, FactSet, and GS Global ECS Research.

First, US economic data released since the start of 2012 has exceeded our expectations. US GDP in 1Q 2012 appears to be expanding at a pace of 2%, well above our initial assumption. The Goldman Sachs Economics Current Activity Indicator (CAI) for 1Q 2012 was tracking at an even faster rate of 2.9%. However, our Economics Research team forecasts that during the next several months US economic growth will decelerate to an annual pace of roughly 2%. We anticipate a deceleration in US economic activity during next few months for several reasons: (1) Recent strength has reflected the extremely mild weather that has pulled forward activity. (2) The inventory cycle contributed approximately 2 percentage points to 4Q 2011 GDP growth and inventory accumulation may have picked up a bit further in the early part of 1Q 2012. (3) Gasoline prices have surged by 9% YTD on a seasonally-adjusted basis and have started to cut into real income. The Goldman Sachs Economics model indicates a gas price rise of that magnitude may curb real GDP growth by 30-40 bp during the subsequent year. (4) Early signs of deceleration in the economic data have recently emerged given the rolling US-MAP score of economic surprises now hovers around zero (see US Daily: Sticking with Sluggish, Goldman Sachs, March 19, 2012). Second, the P/E multiple has expanded by 9% compared with our forecast that it would remain stable, consistent with the historical performance of equity markets in countries experiencing extended periods of sub-trend economic growth. The S&P 500 now trades at 14.0x our top-down 2012 EPS estimate of $100, a 12% expansion from the 12.5x P/E at the start of the year. Based on consensus bottom-up EPS estimates, the S&P 500 currently trades at 13.2x forward EPS, up 9% from 12.1x at the beginning of 2012.
Goldman Sachs Global Economics, Commodities and Strategy Research 2

March 23, 2012

United States

Exhibit 3: Goldman Sachs US Economics GDP forecasts

as of March 21, 2012
4.0 % 3.5 % 3.0 % 2.5 % 2.0 % 1.5 % 1.0 % 0.5 % 0.0 % 0.4 1.3 1.8 3.0 2.5 2.0 2.0 2.0 2.0 2.0 2.5 2.5

Exhibit 4: US macro data posting negative surprises

as of March 21, 2012
100 75

GDP Growth (qoq annualized %)

Goldman Sachs Economics Consensus

Rolling 1-Month US MAP Score

Positive Data Surprises

50 25 0 (25) (50) (75) (100) (125)

Q1A Q2A Q3A Q4A Q1E Q2E Q3E Q4E Q1E Q2E Q3E Q4E
30-Sep-11 31-May-11 30-Nov-11 31-Mar-11 31-Jul-11 31-Jan-11

Negative Data Surprises

31-May-12 31-Mar-12 31-Jan-12

2011

2012

2013

Source: Bloomberg and Goldman Sachs Global ECS Research.

Source: Goldman Sachs Global ECS Research.

Investor sentiment drives multiples. Unquestionably, the most important development during 1Q 2012 contributing to a higher P/E multiple was the ECBs Long-Term Refinancing Operation (LTRO) that provided European banks unlimited 3-year funding at 1%. On a combined basis, LTRO round 1 (December 21st) and round 2 (February 29th) totaled 1.1 Trillion and the ECBs balance sheet is now 50% larger than it was last summer. Other milestones contributing to a P/E multiple expansion during 1Q 2012 include the following: (1) the orderly restructuring of Greek sovereign debt; (2) smooth refinancing of maturing sovereign debt of peripheral European countries such as Spain and Italy; and (3) the release of the Comprehensive Capital Analysis and Review (CCAR), also known as the bank stress test, on March 13th. The Fed approved the capital plans of most banks in terms of proposed dividend hikes and share repurchases. The positive test results reassured investors that the US banking system has largely recovered from the 2008 crisis. Developments YTD that would suggest a contracting P/E multiple include: (1) negative EPS revisions across nearly every sector of the market; (2) lack of significant inflows to domestic equity mutual funds and further inflows into domestic fixed income funds; (3) higher crude oil prices that pressures margins; and (4) personal income growth has remained weak, rising at an annual rate less than 2%. Slow wage growth coupled with a flat savings rate supports our view that GDP growth will be below-trend in 2012. Exhibit 5: Negative EPS and sales revisions for sectors
as of March 20, 2012

Exhibit 6: Net equity outflow since 2006 totals $24 billion

as of March 14, 2012
800

Information Technology Industrials Health Care Utilities S&P 500 Consumer Discretionary Consumer Staples Financials Energy Materials Telecommunication Services

3 Month 2012 Revisions EPS Sales 3.9 % 1.6 % (0.6) (0.2) (1.4) 0.4 (1.4) NM (1.5) 1.6 (1.6) (0.4) (2.4) 0.2 (3.5) NM (4.3) 8.0 (7.0) (1.1) (9.3) 1.0

600

Fund Flows, $Billions

400

Taxable Bonds

200

(200)

Domestic Equities

(400)

Fund Flows

Money Market
2008 2009 2010 2011 2012TD

(600)

2006

2007

Source: FirstCall, I/B/E/S, FactSet, and Goldman Sachs Global ECS Research.

Source: Lipper and Goldman Sachs Global ECS Research.

Goldman Sachs Global Economics, Commodities and Strategy Research

March 23, 2012

United States

Several upcoming macro issues point to rising uncertainty and a lower P/E multiple. (1) Mandatory fiscal austerity looms on the horizon with higher personal tax rates and reduced federal spending in 2013. (2) The economics of the Health Care industry (11% of the S&P 500 equity cap) remain uncertain given the US Supreme Court will hear oral arguments next week and most likely render a decision in June on the status of the Affordable Care Act (ACA, also known colloquially as Obamacare). (3) The US Presidential election is still seven months away but uncertainty is likely to rise as the voting day approaches. Third, we continue to forecast modest earnings growth of 3% in 2012 and 7% in 2013 to $100 and $106, respectively. Consensus bottom-up estimates total $106 and $119 reflecting annual growth of 9% and 13%, respectively. Importantly, analysts have slashed 2012 EPS estimates for most sectors during the past three months. Note that on a trailing fourquarter basis, net margins for the S&P 500 (excluding Financials and Utilities) declined for the first time in 4Q 2011 and on a year/year basis margins fell for all sectors except for Tech (excluding Apple, margins fell for the Tech sector as well). Exhibit 7: S&P 500 rally since the start of 2012 entirely driven by P/E multiple expansion
as of March 21, 2012
1450 1400 1350 14.0 x 13.5 x

S&P 500 Level

S&P 500 Level (LHS)

13.0 x 12.5 x 12.0 x 11.5 x

1300 1250 1200 1150 1100 1050

Jun-11 Jul-11 Aug-11 Feb-11 Feb-12 Mar-11 May-11 Sep-11 Dec-11 Mar-12 Oct-11 Jan-11 Apr-11 Nov-11 Apr-12 Jan-12

P/E Ratio

Forward P/E (RHS)

11.0 x 10.5 x 10.0 x

Source: Compustat, FirstCall, I/B/E/S, and Goldman Sachs Global ECS Research.

Exhibit 8: Information Technology and Financials account for 58% of S&P 500 YTD return
as of March 21, 2012

Information Technology Financials Consumer Discretionary Industrials Health Care Energy Consumer Staples Materials Telecommunication Services Utilities S&P 500

Initial Weight 19 % 13 11 11 12 12 12 4 3 4 100 %

YTD Return 20.6 % 22.1 15.0 11.6 6.2 5.6 4.0 11.6 4.6 (3.0) 12.1 %

Contribution to S&P 500 Return 393 bp 297 160 124 73 68 46 41 15 (12) 1205 bp

Share 33 % 25 13 10 6 6 4 3 1 (1) 100 %

Source: Compustat, FactSet, and Goldman Sachs Global ECS Research.

Goldman Sachs Global Economics, Commodities and Strategy Research

March 23, 2012

United States

Today vs. 2007: Deconstructing the past for insights into the future
S&P 500 currently trades 10% below its all-time peak of 1565 reached roughly 4 years ago on October 9, 2007. The index point decline stems from a combination of changes in the (1) level of earnings; (2) expected EPS growth rate; and (3) P/E multiple. We disaggregate the change in the level of the S&P 500 index to understand why the index still trades 10% below its peak despite the fact that EPS has rebounded to a new high. We explore at the sector and company levels the key changes in growth and valuation that have taken place since the market peak. The level of expected EPS has recovered and now stands 3% above its prior peak ($106 vs. $103), but the forward expected earnings growth rate has dropped by 3 percentage points or 25% (from 13% to 9%), and the P/E multiple has compressed by 2 multiple points or 13% (from 15.2x to 13.2x). Exhibit 9: S&P 500 index change: EPS at new high, but growth rate falls, and P/E contracts
as of March 21, 2012

9-Oct-07 Earnings EPS (LTM) EPS (NTM) Expected Growth Valuation (NTM P/E) S&P 500 Index $91 103 12.5 % 15.2 X 1565

21-Mar-12 $97 106 9.4 % 13.2 X 1403

Change Level Percent $5 3 (3.1)pp (2.0)X (162) 6% 3 (25)% (13)% (10)%

Source: IDC, Compustat, FirstCall, I/B/E/S and Goldman Sachs Global ECS Research.

Exhibit 10: Macroeconomic changes between October 2007 and March 2012
as of March 21, 2012

Nominal GDP ($Tr USD) Real GDP Growth: Trailing Expected Headline CPI: Fed Funds Rate 10-Year Yield: Euro / US Dollar US Dollar / Yen Brent: Spot 12-mo fwd Spot Rate Forecast Trailing Expected

9-Oct-07 $14.1 2.5 % 2.4 2.8 % 2.4 4.75 % 4.6 % 4.8 1.41 117 $77 76

21-Mar-12 $15.3 1.6 % 2.3 2.9 % 2.3 0.25 % 2.3 % 2.7 1.32 84 $124 118

Change Level Percent $1.2 8% (85)bp (6) 6 bp (10) (450)bp (235)bp (213) (0.09) (33) $48 42 (34)% (3) 2% (4) (95)% (51)% (44) (6)% (29)% 62 % 55

Source: Blue Chip Economic Indicators, FactSet and Goldman Sachs Global ECS Research.

Goldman Sachs Global Economics, Commodities and Strategy Research

March 23, 2012

United States

Reasons S&P 500 trades 162 points (10%) below October 2007 peak
We disaggregate the overall 162 point S&P 500 index decline into sector-level changes in earnings, growth rate, and multiple. Four primary reasons explain why the S&P 500 still trades 10% below its all-time peak in 2007: (1) Financials earnings remain 45% below their 2007 peak; (2) the P/E for Industrials is 18% or three multiple points below the P/E in 2007; (3) the expected EPS growth rate for Health Care has plummeted by 85% to just 2% from 15% in 2007. These three negative developments were offset by (4) a doubling in Information Technology earnings since 2007.

Financials

The largest negative impact to S&P 500 index level is caused by the collapse in Financials earnings. Current trailing four-quarter earnings of $14 per share are 45% below
October 2007 LTM earnings of $25. Although consensus expects Financials earnings to grow by 32% in 2012 compared with 8% expected growth in 2007. The level of EPS is still far below peak levels. Note that Financials forward P/E remained constant at 11.8x.

Industrials

Multiple contraction in Industrials is a less significant but still notable contributor to the decline in the S&P 500 index since 2007. Both the level of profits and the expected
EPS growth for Industrials remained virtually unchanged during 4 years but the P/E multiple compressed by nearly 3 full points from 16.6x to 13.7x. General Electric (GE) accounts for more than 80% of the index point decline attributed to Industrials (25 of 31).

Health Care

Health Care represents a similar situation as Industrials. In the case of Health Care, it is a combination of both a plunge in expected EPS growth from 15% to 2% -- as well as a multiple contraction from 16.1x to 12.2x that combine to account for 17% of the S&P 500 index point decline (27 of 162 points). The largest positive impact to the S&P 500 index comes from the growth in realized Information Technology earnings, which doubled over this period (to $19 from $10).
However, excluding Apple (AAPL), the change in index points attributable to Information Technology is actually negative as a sharp contraction in P/E and slower growth expectations offset the higher level of realized earnings.

Information Technology

Exhibit 11: Drivers of S&P 500 index change between all-time peak on October 9, 2007 and March 21, 2012
as of March 21, 2012
9-Oct-07 LTM Expected EPS Growth $9.85 24 % 6.55 19 7.56 10 2.96 10 3.10 10 3.30 12 13.58 10 9.96 15 9.74 11 24.81 8 $91.42 13 % P/E NTM 20.8 X 18.2 17.6 15.2 16.0 15.5 12.1 16.1 16.6 11.8 15.2 X LTM EPS $19.42 8.79 9.14 3.49 3.55 2.18 14.34 12.54 9.89 13.56 $96.89 21-Mar-12 Expected Growth 10 % 10 7 4 (6) (4) 2 2 10 32 9% P/E NTM 13.5 X 15.9 15.4 13.5 14.1 19.1 11.0 12.2 13.7 11.8 13.2 X Change in S&P 500 index points EPS Expected Forward Level Growth P/E Total 129 (6) (89) 34 10 36 (7) (18) 3 24 (3) (19) (1) 7 (2) (6) (8) 6 (8) (6) (17) (21) (9) 13 8 (12) (16) (20) (14) (44) (27) 32 (32) (31) 2 (1) (132) 26 0 (106) 90 (36) (217) (162)

Sector Information Technology Consumer Discretionary Consumer Staples Materials Utilities Telecom Services Energy Health Care Industrials Financials S&P 500

LTM EPS uses analyst forecast methodology which differs from Standard & Poors due to varying definitions of operating earnings and other accounting differences. Source: IDC, Compustat, FirstCall, I/B/E/S and Goldman Sachs Global ECS Research.

Goldman Sachs Global Economics, Commodities and Strategy Research

March 23, 2012

United States

Exhibit 12: Change in EPS level, Oct 2007 vs. Mar 2012
as of March 21, 2012
Info Tech Cons Discretionary Health Care Consumer Staples Materials Utilities S&P 500 Energy Industrials Telecom Services Financials
(80)

Exhibit 13: Change in forward Earnings Growth rate

as of March 21, 2012

97% 34% 26% 21% 18% 14% 6% 6% 1% (34)% (45)%

(60) (40) (20) 0 20 40 60 80 100 120

Financials Industrials S&P 500 Consumer Staples Cons Discretionary Materials Information Tech Energy Health Care Telecom Services Utilities

280% (8)% (25)% (37)% (50)% (58)% (58)% (84)% (85)% (129)% (160)%
(50) 0 50 100 150 200 250 300 350

(250) (200) (150) (100)

Change in S&P 500 LTM EPS

Change in NTM EPS Growth

Source: Goldman Sachs Global ECS Research.

Source: Goldman Sachs Global ECS Research.

Exhibit 14: Change in P/E multiple (NTM)

as of March 21, 2012
Telecom Services Financials Energy Materials Utilities Consumer Staples Cons Discretionary S&P 500 Industrials Health Care Information Tech
(50)

Exhibit 15: Change in index price

as of March 21, 2012
23%
Information Tech Cons Discretionary Consumer Staples Materials S&P 500 Energy Utilities Health Care Industrials Telecom Services Financials

13% 7% 2% (1)% (10)% (11)% (14)% (15)% (17)% (30)% (33)%

(30) (20) (10) 0 10 20

0% (9)% (11)% (12)% (13)% (13)% (13)% (18)% (24)% (35)%

(40) (30) (20) (10) 0 10 20 30

(40)

Change in P/E (NTM)

Change in S&P 500 Price

Source: Goldman Sachs Global ECS Research.

Source: Goldman Sachs Global ECS Research.

Goldman Sachs Global Economics, Commodities and Strategy Research

March 23, 2012

United States

Exhibit 16: 2007 Decomposition of level and change in earnings, EPS growth, P/E multiple, index price, and attribution
as of March 21, 2012
A
LEVEL Sector Information Technology Consumer Discretionary Consumer Staples Materials Utilities Telecom Services Energy Health Care Industrials Financials S&P 500 CHANGE Sector Information Technology Consumer Discretionary Consumer Staples Materials Utilities Telecom Services Energy Health Care Industrials Financials S&P 500 Points $9.57 2.24 1.58 0.52 0.45 (1.12) 0.76 2.58 0.14 (11.25) $5.48 % 97 % 34 21 18 14 (34) 6 26 1 (45) 6% Growth (14)pp (10) (4) (6) (16) (16) (8) (12) (1) 23 (3)pp % (58)% (50) (37) (58) (160) (129) (84) (85) (8) 280 (25)% Multiple (7.3)X (2.4) (2.3) (1.7) (1.9) 3.6 (1.1) (3.8) (2.9) 0.0 (2.0) % (35)% (13) (13) (11) (12) 23 (9) (24) (18) 0 (13)% Points 34 10 3 (1) (8) (17) (20) (27) (31) (106) (162) % 13 % 7 2 (1) (14) (30) (11) (15) (17) (33) (10)% Weight 431 bp 179 127 31 (15) (81) (11) (55) (86) (521) 0 bp % 27 % 20 14 10 (4) (22) (1) (5) (7) (26) 0% Contribution to S&P 500 LTM EPS 9-Oct-07 21-Mar-12 $9.85 $19.42 6.55 8.79 7.56 9.14 2.96 3.49 3.10 3.55 3.30 2.18 13.58 14.34 9.96 12.54 9.74 9.89 24.81 13.56 $91.42 $96.89

B
Expected NTM EPS Growth 9-Oct-07 21-Mar-12 24 % 10 % 19 10 10 7 10 4 10 (6) 12 (4) 10 2 15 2 11 10 8 32 13 % 9%

C
P/E (NTM) 9-Oct-07 21-Mar-12 20.8 X 13.5 X 18.2 15.9 17.6 15.4 15.2 13.5 16.0 14.1 15.5 19.1 12.1 11.0 16.1 12.2 16.6 13.7 11.8 11.8 15.2 X 13.2 X

D
Contribution to S&P 500 Price 9-Oct-07 21-Mar-12 253 287 143 153 147 150 50 49 55 47 57 40 181 161 184 157 180 149 316 211 1565 1403

E
Index Level Attribution 9-Oct-07 21-Mar-12 16.2 % 20.5 % 9.1 10.9 9.4 10.7 3.2 3.5 3.5 3.3 3.7 2.9 11.6 11.5 11.7 11.2 11.5 10.6 20.2 15.0 100.0 % 100.0 %

LTM EPS uses analyst forecast methodology which differs from Standard & Poors due to varying definitions of operating earnings and other accounting differences. Source: IDC, Compustat, FirstCall, I/B/E/S and Goldman Sachs Global ECS Research.

How to read this Exhibit: Example of Information Technology

A. EARNINGS: In October 2007, the level of consensus bottom-up trailing 12-month (LTM)
earnings for the Information Technology sector equaled $9.85 (in S&P 500 points). In March 2012, the level of LTM earnings for Information Technology equaled $19.42. The change in level increased by $9.57 or 97%.

B. GROWTH: In October 2007, expected EPS growth for Information Technology equaled
24% but now equals 10%. The change in expected EPS growth represented a drop of 14 percentage points (pp) or 58%.

C. MULTIPLE: In October 2007, Information Technology traded at 20.8x consensus bottomup forward 12-month EPS. Today the Information Technology sector trades at 13.5x NTM EPS. The change in P/E multiple represented a compression of 7.3 multiple points or 35%. D. CONTRIBUTION: In October 2007, Information Technology contributed 253 points to the overall S&P 500 index level of 1565. In March 2012, Information Technology contributed 287 points to the index level of 1403, an incremental contribution of 34 points, or positive 13%. E. ATTRIBUTION: In October 2007, Information Technology accounted for 16.2% of the equity capitalization of the S&P 500 index. In March 2012, Information Technology accounted for 20.5% of the S&P 500 equity cap, an increase of 431 percentage points or 27%.

Goldman Sachs Global Economics, Commodities and Strategy Research

March 23, 2012

United States

Company level analysis: The non-trivial impact of AAPL and GE

We decompose the change to the S&P 500 index between 2007 and today at the firm level. Most companies do not have a meaningful impact on the overall S&P 500 index level. However, Apple (AAPL) and General Electric (GE) dramatically affect the aggregate changes in their respective sectors and for the broad index. AAPL was the primary reason Information Technology made a positive contribution to the S&P 500 index level change since the market peaked in 2007. Excluding AAPL, the Technology sector contributed to the decline in the index. AAPL contributed positive 46 points to the index mode while the rest of the Information Technology in aggregate reduced the index level of the S&P 500 by 11 bp (see Exhibit 17). The key differences included the change in earnings level and expected growth rate. AAPLs earnings in S&P 500 points increased ten-fold from $0.35 (4% of aggregate Technology EPS) in October 2007 to $3.62 (19% of Technology sector EPS) in March 2012. The rest of the Technology sector also delivered earnings growth but the rise totaled 66%. However, while AAPLs expected EPS growth rate remained robust, slipping from 26% to 22%, expected EPS growth in the balance of the Technology sector dropped from 24% to just 7% and the P/E multiple compressed from 20.1x forward EPS to 13.3x. Exhibit 17: Apple drives change in the Information Technology sector
as of March 21, 2012
LTM EPS $0.35 9.50 $9.85 4% 9-Oct-07 Expected Growth 26 % 24 24 % P/E NTM 37.6 X 20.1 20.8 X LTM EPS $3.62 15.80 $19.42 19 % 21-Mar-12 Expected Growth 22 % 7 10 % P/E NTM 14.1 X 13.3 13.5 X Change in S&P 500 index points EPS Expected Forward Level Growth P/E Total 46 84 129 10 (15) (6) (10) (80) (89) 46 (11) 34 134 %

Sector Apple Inc. (AAPL) Info Tech ex. AAPL Information Technology AAPL as % of Info Tech

Source: IDC, Compustat, FirstCall, I/B/E/S and Goldman Sachs Global ECS Research.

In the case of Industrials, GE was responsible for almost all of the sectors negative impact on the S&P 500 index level since 2007. The level of earnings and the P/E multiple represented the key reasons why GE had a negative impact of the S&P 500 index. The rest of Industrials had a minimal impact on the S&P 500 index (just 5 points). GE earnings fell 34% while EPS for Industrials excluding GE rose by 13%. The multiple change was particularly striking as GE s multiple compressed by 26% from 17.5x expected EPS to 12.9x. Industrials ex-GE experienced a P/E compression of 15% from 16.2x to 13.8x forward EPS. Exhibit 18: General Electric drives change in the Industrials sector
as of March 21, 2012
LTM EPS $2.44 7.31 $9.74 25 % 9-Oct-07 Expected Growth 14 % 10 11 % P/E NTM 17.5 X 16.2 16.6 X LTM EPS $1.60 8.28 $9.89 16 % 21-Mar-12 Expected Growth 13 % 10 10 % P/E NTM 12.9 X 13.8 13.7 X Change in S&P 500 index points EPS Expected Forward Level Growth P/E Total (11) 13 2 (2) 1 (1) (13) (20) (32) (25) (5) (31) 83 %

Sector General Electric Co. (GE) Industrials ex. GE Industrials GE as % of Industrials

Source: IDC, Compustat, FirstCall, I/B/E/S and Goldman Sachs Global ECS Research.

Goldman Sachs Global Economics, Commodities and Strategy Research

March 23, 2012

United States

Exhibit 19: Top 20 and bottom 20 stocks ranked by contribution to S&P 500 index level change, 9 Oct 07 vs. 21 Mar 12
as of March 21, 2012
Contribution to S&P 500 NTM EPS 9-Oct-07 21-Mar-12 0.44 4.40 1.17 1.91 1.15 1.51 0.64 1.02 0.05 0.05 0.41 0.71 (0.12) 0.65 0.40 0.64 0.50 0.76 0.23 0.43 0.09 0.16 0.16 0.25 0.51 0.49 0.48 1.19 0.46 0.69 0.15 0.22 0.10 0.19 0.23 0.21 0.19 0.39 0.34 0.49 7.57 102.86 16.37 105.99 Expected NTM EPS Growth 9-Oct-07 21-Mar-12 26 % 22 % 19 10 (5) 9 12 6 87 (3) 12 13 71 (19) 13 8 17 1 21 20 27 24 206 112 8 16 40 17 27 26 19 16 11 16 (21) 14 29 14 (1) 10 13 % 9% P/E (NTM) 9-Oct-07 21-Mar-12 37.6 X 14.1 X 15.5 13.7 15.3 15.4 20.3 17.5 69.9 143.6 20.0 17.4 NM 8.1 19.3 16.9 12.7 11.5 15.4 14.0 25.4 27.6 17.0 19.6 12.6 17.5 33.7 15.1 13.1 11.4 17.8 20.4 15.2 16.9 12.8 21.1 27.8 16.9 18.0 15.2 15.2 X 13.2 X Contribution to S&P 500 Price Index Contribution Change 9-Oct-07 21-Mar-12 Points % 17 62 46 275 % 8 18 26 44 6 18 23 32 13 18 5 36 4 3 8 134 4 8 12 54 2 5 3 167 3 8 11 41 2 6 9 39 2 4 6 67 2 2 4 98 2 3 5 80 2 6 8 31 2 16 18 11 2 6 8 31 2 3 4 66 2 1 3 117 2 3 4 54 1 5 7 28 1 6 7 23 148 1565 250 1403 102 (162) 69 % (10)

Name Apple Inc. International Bus. Machines Altria Group Coca-Cola Co. Amazon.com QUALCOMM Inc. Ford Motor Co. McDonald's Corp. Occidental Petroleum Union Pacific Corp. Starbucks Corp. Simon Property Group Home Depot Google Inc. Caterpillar Nike Inc. TJX Cos. Anadarko Petroleum EMC Corp. Kraft Foods Top 20 S&P 500

Ticker AAPL IBM MO/PM KO AMZN QCOM F MCD OXY UNP SBUX SPG HD GOOG CAT NKE TJX APC EMC KFT

Sector Information Technology Information Technology Consumer Staples Consumer Staples Consumer Discretionary Information Technology Consumer Discretionary Consumer Discretionary Energy Industrials Consumer Discretionary Financials Consumer Discretionary Information Technology Industrials Consumer Discretionary Consumer Discretionary Energy Information Technology Consumer Staples

Name Exelon Corp. Dell Inc. JPMorgan Chase Procter & Gamble Schlumberger Ltd. Morgan Stanley ConocoPhillips Sprint Nextel Corp. Wells Fargo & Co. Verizon Communications Merck & Co Inc AT&T Inc. Pfizer Inc. Cisco Systems Hewlett-Packard Citigroup Inc. Exxon Mobil Corp. American Intl Group Bank of America General Electric Bottom 20 S&P 500

Ticker EXC DELL JPM PG SLB MS COP S WFC VZ MRK T PFE CSCO HPQ C XOM AIG BAC GE

Sector Utilities Information Technology Financials Consumer Staples Energy Financials Energy Telecom Services Financials Telecom Services Health Care Telecom Services Health Care Information Technology Information Technology Financials Energy Financials Financials Industrials

Contribution to S&P 500 NTM EPS 9-Oct-07 21-Mar-12 0.47 0.28 0.38 0.35 2.25 2.03 1.27 1.28 0.75 0.70 0.90 0.31 1.79 1.22 0.30 (0.50) 2.22 1.89 0.99 0.78 1.12 1.28 2.11 1.54 2.37 1.88 1.08 1.14 1.02 0.97 2.63 1.32 4.70 4.29 2.01 0.16 3.40 0.88 2.78 1.82 34.54 102.86 23.62 105.99

Expected NTM EPS Growth 9-Oct-07 21-Mar-12 23 % (29)% 18 (2) (2) 7 18 6 32 29 (4) 66 2 (2) (11) (127) 9 15 10 16 25 1 18 7 8 (3) 17 11 16 (0) 8 10 4 (2) 7 122 (4) NM 14 13 13 % 9%

P/E (NTM) 9-Oct-07 21-Mar-12 16.6 X 13.0 X 18.8 8.4 10.4 9.4 19.8 16.1 21.1 15.6 9.2 10.8 8.8 9.0 19.8 NM 11.4 10.5 18.0 15.9 17.5 9.9 13.8 13.6 11.6 9.6 21.1 10.7 16.3 5.3 10.2 9.3 13.0 10.4 10.2 10.6 10.3 13.2 17.5 12.9 15.2 X 13.2 X

Contribution to S&P 500 Price Index Contribution Change 9-Oct-07 21-Mar-12 Points % 8 4 (4) (54)% (4) 7 3 (60) (4) 24 19 (19) 25 20 (5) (19) (5) 16 11 (31) (5) 8 3 (59) 16 11 (5) (31) (5) 6 1 (84) (5) 25 20 (21) (5) 18 12 (30) (7) 20 13 (35) (8) 29 21 (28) (9) 28 18 (34) (11) 23 12 (47) (12) 17 5 (69) (15) 27 12 (54) (16) 61 45 (27) (19) 20 2 (92) (23) 35 12 (67) (25) 49 23 (52) 460 1565 268 1403 (192) (162) (42)% (10)

Note: 2007 data for companies listed incorporate earnings and market cap of S&P 500 firms acquired since October 9, 2007. Example: BAC acquired MER and CFC. Source: IDC, Compustat, FirstCall, I/B/E/S and Goldman Sachs Global ECS Research.

Goldman Sachs Global Economics, Commodities and Strategy Research

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United States

Margins are a headwind to the S&P 500 returning to peak levels

Our expectation the US economy registers its fifth consecutive year of below-trend GDP growth in 2012 underpins our equity market forecast. The history of equity returns in countries experiencing multi-year economic stagnation shows P/E multiples typically remain constant. Stronger GDP growth would benefit both multiples and earnings growth and represents one of the key macro risks to our outlook. A cautious view of the intermediate return prospects for the S&P 500 assumes slower earnings growth will be reflected in a lower multiple. Numerically, the expected 12-month EPS growth rate has dropped by 25% to 9.4% from 13% in October 2007 and the reduced EPS growth rate should translate into a lower P/E multiple, all else equal. A bullish thesis for a higher S&P 500 index level assumes the P/E multiple expands above its long-term average. The average forward P/E multiple for the S&P 500 since 1976 equals 12.8x. The P/E multiple for the last five years and ten years averaged 13.8x and 14.8x, respectively. Earnings multiple is a shorthand valuation tool that incorporates many variables. If the S&P 500 trades at 15x forward EPS a belief expressed by many fund managers then the S&P 500 index would rise by approximately 14% to 1590 from the current level of 1403. However, net margins stand at record high levels compared with October 2007 (8.8% vs. 8.1%). We find it hard to make a credible argument that investors should buy stocks at an above-average multiple of earnings when those earnings stem in part from record margins that have already started to decline. Our top-down model forecasts margins of 8.7% in 2012 compared with bottom-up consensus that expects margins of 9.1%. Every 50 bp shift in margins translates into $4 per share in EPS or 60 S&P 500 index points at a 15x multiple. If an investor wants to assign a long-term average P/E to the market, then it seems only appropriate to assume a long-term average or normalized margin. Margins averaged 5.8% since 1976 while margins during the last five and ten years averaged 7.8% and 7.3%, respectively. If one assumes 2012 bottom-up consensus sales estimates and applies an 8% margin (which translates into EPS of $95) or a 7% margin ($86) and applies a 15x multiple, the implied S&P 500 index value would equal 1425 or 1290, respectively. Exhibit 20: S&P 500 profit margins have been flat since 2Q. We forecast stability; consensus expects further expansion
as of March 20, 2012
11% 10% 9% 8% 7% 6%
5.9
7% 11%

Bottom-up Consensus Forecast

Bottom-up Consensus Forecast

10%

S&P 500 Net Profit Margin

8.8
9%

2Q 2011 8.9% 1Q 2011 8.7%

3Q 2011 8.9%

4QE 2011 8.8%

2012E 9.1%

2013E 9.7%

8.7%

8.9%

8%

Goldman Sachs Forecast

5% 4% 3%
Dec-79 Dec-84 Dec-89 Dec-94 Dec-99
4.7 3.9

Goldman Sachs Portfolio Strategy

6%

S&P 500 Net Profit Margin (trailing four quarters)

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14

Dec-04

Dec-09

Source: Compustat, First Call, I/B/E/S, and Goldman Sachs Global ECS Research.

Goldman Sachs Global Economics, Commodities and Strategy Research

Dec-14

5%

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March 23, 2012

United States

Information Technology is the largest sector in the S&P 500 and currently accounts for more than 20% of the equity capitalization of the index. For nearly 30 years the sectors net margins generally ranged between 6% and 10%. However, beginning in 2009 margins began to leap higher and now stand at 16.6% on a trailing four-quarter basis as of 4Q 2011. Bottom-up consensus forecasts Tech margins will reach 17.8% in 2012 and 18.6% in 2013. Our top-down model forecasts the sectors margins will climb slightly to 16.9% this year and 17.0% in 2013 (see Exhibit 21). One explanation for the surge in Information Technology margin has been the structural shift from hardware and software to internet and cloud-based companies. However, the recent increase in the Tech sector margin is entirely attributable to AAPL. During 4Q 2011 the Tech sector posted year/year EPS growth of 18% and margin expanded by 39 bp to 17.7%. Excluding AAPL, the year/year EPS growth was just 1% and sector margins actually dropped by 107 bp to 15.6% (see Exhibit 22). For 1Q 2012, consensus expects Information Technology will post EPS growth of 11% and margins will rise by 16 bp to 16.4%. Analysts expect AAPL will lead the industry with EPS growth of 51% powered by 46% jump in sales and a 74 bp margin expansion to 25.0%. The Tech sector excluding AAPL will experience EPS growth of just 4% on 6% growth in sales as margins fall by 30 bp to 15.0% (see Exhibit 23). So-called new Tech is growing at the expense of old Tech. Although aggregate revenue growth may be the same, the margin implications of the shift may be significant. Future margin expansion of new Tech firms is likely to decelerate and perhaps flatten while old Tech companies may still expand margins, albeit from much lower levels. The aggregate impact may result in flattening sector margins and consequently negative EPS revisions relative to current consensus expectations. Multiples might compress as a result, which will have negative implications for the S&P 500 index given it is the largest sector. Exhibit 21: Information Technology net profit margin at record peak; is sky the limit?
as of March 21, 2012

22% 20% 18% 16% 14% 12% 10% 8% 6% 4% 2%

Dec-79

Net Profit Margin

Bottom-Up Consensus Forecast

2013E 18.6% 17.0%

Information Technology

9.7% 8.9%

S&P 500
Dec-82 Dec-85 Dec-88 Dec-91 Dec-94 Dec-97 Dec-00 Dec-03 Dec-06

Dec-09

Dec-12

Dec-15

Source: Compustat, I/B/E/S, FirstCall, and Goldman Sachs Global ECS Research.

Goldman Sachs Global Economics, Commodities and Strategy Research

Dec-18
12

0%

Goldman Sachs Portfolio Strategy Forecast

March 23, 2012

United States

Exhibit 22: Apples impact on 4Q 2011 S&P 500 earnings, sales, and margins
as of March 21, 2012

4Q 2011
EPS Growth 21 % 18 10 9 6 4 4 2 (27) (42) 8% 6 119 % Sales Growth NM 15 % NM 21 7 7 6 7 5 8 10 % 74 % Margin Level Change NM NM 17.7 % 39 bp NM 7.0 6.7 8.0 6.3 8.4 4.2 4.0 8.4 % 28.1 % NM (74) (6) (23) (16) (37) (184) (350) (35)bp 574 bp

Financials Info Tech Utilities Energy Consumer Discretionary Industrials Consumer Staples Health Care Telecom Services Materials S&P 500 ex. Financials and Utilities Apple (AAPL) Excluding Apple S&P 500 ex. Financials and Utilities Info Tech excluding AAPL

5% 2 1

9% 8

7.9 % (61)bp 15.6 (107)

Source: Compustat, I/B/E/S, FirstCall, and Goldman Sachs Global ECS Research.

Exhibit 23: Apples impact on 1Q 2012 S&P 500 earnings, sales, and margins
as of March 21, 2012

1Q 2012E
EPS Growth 17 % 13 11 8 3 1 (2) (4) (12) (16) 6% 4 51 % Sales Growth NM 9% 10 3 14 NM 5 4 6 5 7% 46 % Margin Level Change NM NM 7.8 % 29 bp 16.4 16 9.8 7.6 NM 5.8 6.1 8.3 5.6 8.5 % 25.0 % 46 (79) NM (44) (54) (168) (140) (28)bp 74 bp

Financials Industrials Info Tech Health Care Energy Utilities Consumer Staples Consumer Discretionary Materials Telecom Services S&P 500 ex. Financials and Utilities Apple (AAPL) Excluding Apple S&P 500 ex. Financials and Utilities Info Tech excluding AAPL

5% 2 4

7% 6

8.2 % 15.0

(38)bp (30)

Source: Compustat, I/B/E/S, FirstCall, and Goldman Sachs Global ECS Research.

Goldman Sachs Global Economics, Commodities and Strategy Research

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United States

Low Financials ROE remains an impediment to a higher S&P 500

Earlier in this report we identified that the Financials sector accounted for 65% of the fall in the S&P 500 index between October 2007 and March 2012. Financials EPS plunged by 45% during the same period while the forward P/E multiple remained unchanged at 11.8x.

Low Financials return on equity (ROE) represents a headwind for a higher S&P 500 index level. The Financials sector accounts for nearly one-third of S&P 500 book value but
just 14% of the index earnings (see Exhibit 24). As a result, the sectors ROE and its impact on price-to-book (P/B) valuation are greater than its impact on earnings. During full-year 2011 S&P 500 Financials generated a ROE of 10.2%. For the previous 16 quarters Financials trailing four-quarter ROE had remained below 10% (see Exhibit 25). However, the entire rise in Financials ROE was essentially driven by tax benefits. While S&P 500 ex-Financials ROE reached an all-time high of 20.8%, the largest sector (by book value) would have posted a ROE below 9% if tax rates remained at the 3Q 2011 level of 25%. S&P 500 Financials sector had a negative effective tax rate in 4Q 2011 which lowered the full-year 2011 tax rate to 14.5%. Sales/asset turnover and asset/equity leverage continued to decline, reinforcing the two largest headwinds for the sector: low activity and shrinking balance sheets.

The easiest path to recovery in Financials ROE is through higher leverage. Since
peaking in 4Q 2008, Financials asset/equity leverage has declined by 37% to 9.1X from 14.3X and now stands at the 1st percentile of leverage since 1975. A return to peak leverage would raise ROE to 16.1%, all else equal, despite EBIT margins and asset turnover that remain well below peak levels. However, in the new regulatory world it is unlikely any financial institution will be permitted to operate with pre-2008 leverage ratios. Each 100 bp rise in Financials ROE increases S&P 500 ROE by approximately 32 bp. For example, if Financials ROE reached 16.1% it would suggest the overall S&P 500 index level ROE would reach 18.8%. For reference, Financials ROE has averaged just 12.9% since 1975. If negative ROE periods are removed, the Financials sector has generated an average ROE just below 14%. Exhibit 24: Book value vs. ROE for S&P 500 sectors
as of December 31, 2011
30%
Info Tech Staples Materials Industrials Discretionary Health Care Energy

25%

Financials large share of S&P 500 book value magnifies the impact of the sector's low ROE on the index

4Q 2011 Sector ROE

20%

15%
Utilities Telecom Services

S&P 500 ROE = 16.9%

10%

Financials

5%

0% 0% 5% 10% 15% 20% % of S&P Book Value 25% 30% 35%

Source: Compustat and Goldman Sachs Global ECS Research.

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United States

Exhibit 25: Trailing four-quarter return on equity, 1975-2013E

as of December 31, 2011
25% 20%

S&P 500 (ex-Financials)

GS Forecast

Return on Equity (LTM)

15% 10% 5% 0% (5%) (10%)

Return on Equity (LTM)

Dec-75 Dec-79 Dec-83 Dec-87 Dec-91 Dec-95

Financials

Dec-99

Dec-03

Dec-07

Dec-11
18

Source: Compustat and Goldman Sachs Global ECS Research.

The prospect of a rebound in Financials earnings and ROE represents a key to the future path of the S&P 500 index. Unfortunately, several impediments exist that may restrain a quick rise in both the level of profits for Financials. Selected headwinds include the low interest rate environment that the Fed anticipates will persist through 2014, the high cash balances of corporations that limits loan demand, the tight lending standards that constrain mortgage origination volume, a reduced level of M&A activity, low equity trading volumes, and the implementation of Dodd-Frank legislation and Volcker Rules that place restrictions on certain trading and principal activities. In addition, the low leverage now mandated by various regulatory entities constrains the ability of Financials to generate a higher ROE. We forecast S&P 500 Financials ROE will average 8.4% in 2012 and 9.0% in 2013. The distribution of 2012 and 2013 ROE estimates for S&P 500 Financials companies under Goldman Sachs research coverage appears in Exhibits 26 and 27. The valuation of S&P 500 Financials reflects low expected ROE given the sector trades at 1.0x Book Value. Financials ROE could increase faster than we anticipate given large banks remain highly levered to a recovery in the US housing market. In addition, banks are still incurring high costs related to the financial crisis and these costs should decline over time. Exhibit 26: GS 2012 ROE estimates for S&P 500 Financials
as of March 21, 2012
% S&P 500 Financials' Book Value

Exhibit 27: GS 2013 ROE estimates for S&P 500 Financials

as of March 21, 2012
% S&P 500 Financials' Book Value

45% 40% 35% 30% 25% 20% 15% 10% 5% 0% <0 2 4 6 8 10 12 14 16 2012E ROE (%) 18 20 22 24 25+

45% 40% 35% 30% 25% 20% 15% 10% 5% 0% <0 2 4 6 8 10 12 14 16 2013E ROE (%) 20 22 24 25+

Book valueweighted average 2012E ROE = 8.4%

Book valueweighted average 2013E ROE = 9.0%

Source: Goldman Sachs Research.

Source: Goldman Sachs Research.

Goldman Sachs Global Economics, Commodities and Strategy Research

Dec-15

15

March 23, 2012

United States

Equity valuation: Historically average but low versus bond yields

The S&P 500 P/E multiple currently appears fair to slightly overvalued using most of our valuation approaches. These methods include a macroeconomic regression model,
an uncertainty-based implied P/E multiple model, our dividend discount model (DDM), and a cyclically-adjusted P/E model (see Exhibit 28).

Only our Fed model, which relates equity valuation to bond yields, suggests meaningful upside to S&P 500 P/E using either real or nominal bond yields. Based on
the relationship since 2000, the initial reaction of equity markets to rising bond yields is likely to be positive if the move higher in yields is driven by better growth expectations. See The Multiple Mystery: US equity earnings yield vs. bond yield, March 20, 2012.

Macro and cash-flow based approaches suggest the S&P 500 is on average within 5% of fair value. Equities appear fairly priced relative to their history, the level of uncertainty
priced into the market, and our valuation estimates based on discounted cash flows and US economic conditions. In addition, the absolute level of the forward P/E multiple is slightly above its 35-year average of 12.8x. We assess S&P 500 valuation through a number of frameworks including: (1) dividend discount model (DDM) that is based on cash flows discounted at the cost of equity; (2) topdown macroeconomic model that relies on inflation and the US economys output gap; (3) uncertainty-based estimate; (4) cyclically-adjusted valuation; (5) ROE forecast relative to the price-to-book ratio; and (6) Fed Model that value equities relative to the nominal 10-year US Treasury yield, BBB corporate bond yield and 10-year TIPS. Exhibit 28: Six approaches to S&P 500 valuation
as of March 15, 2012

Implied S&P 500 Fair Value

Methodology Fed Model Macroeconomic Regression Uncertainty-based Model US Portfolio Strategy DDM Cyclically Adjusted P/E P/E Multiple 15.3 13.0 12.1 12.8 16.7X Price/Book ROE and Price/Book 2.3X 1410 0% Price Level 1630 1370 1280 1275 1260 Upside 16 (2) (9) (9) (10)%

Average
Source: Goldman Sachs Global ECS Research

1370

(2)%

S&P 500 currently trades in-line with its long run price-to-earnings valuation. The index trades at 13.2X forward earnings estimates vs. 12.8X on average since the mid-1970s. On a cyclically-adjusted basis using operating earnings we estimate the S&P 500 trades at 18.5X relative to an average of 16.7X since 1929 and 22.9X since 1990. Given the prevailing levels of macroeconomic uncertainty, we believe equity valuations fairly reflect the current environment and have been a reasonable proxy for the risk-reward relationship for the past two years.

Goldman Sachs Global Economics, Commodities and Strategy Research

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United States

Exhibit 29: S&P 500 forward P/E is slightly higher than its long-run average since 1976
S&P 500 price / next twelve months EPS estimate
30 25 20 15 10 5 0

S&P 500 forward price/earnings ratio

S&P 500 P/E ratio

12.8X average since 1976

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Source: Compustat, I/B/E/S, and Goldman Sachs Global ECS Research

Peak valuation typically occurs at margin troughs, not peaks. For example, the S&P 500
traded at a P/E of 9.7x in the late 1980s. Margins peaked at 5.8% in 1Q 1989. The multiple rose to 13x (reaching a peak of 15.2x) as margins troughed at 3.8% in 3Q 1992. A notable exception to the pattern occurred during the Information Technology bubble of the late 1990s. At that time the S&P 500 traded at 25X forward earnings when operating profit margins reached a local peak of 7.1% (see Exhibit 30). Exhibit 30: Peak P/E does not typically coincide with peak margins
S&P 500 price / next twelve months EPS estimate vs. operating profit margin

30 25

10 9

S&P 500 forward P/E

20 15

P/E multiple (LHS)

8 7 6

10 5 0
Dec-75 Dec-77 Dec-79 Dec-81 Dec-83 Dec-85 Dec-87 Dec-89 Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09 Dec-11 Dec-13

Operating margin (RHS)

4 3

Source: Compustat, I/B/E/S, and Goldman Sachs Global ECS Research

Goldman Sachs Global Economics, Commodities and Strategy Research

2014

S&P 500 operating margin (%)

17

March 23, 2012

United States

Exhibit 31: S&P 500 cyclically-adjusted P/E in-line with long-term levels as well
S&P 500 cyclically-adjusted P/E as of March 14, 2012
50 45 40

Cyclically Adjusted S&P 500 P/E Ratio

(10-year average trailing EPS)
Current (14-Mar) As Reported 22.5x

Cyclically-Adjusted P/E

35 30 25 20 15 10 5 0 Operating 80 year avg = 16.7x 1932 5.1x 16-Aug-82 6.2x

As Reported 80 year avg = 17.6x

Operating 18.5x

9-Mar-09 9.9x

1929

1934

1939

1944

1949

1954

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

Source: FactSet, Compustat, Haver Analytics , and Goldman Sachs Global ECS Research

Cross-asset investors generally view equities as attractively valued given low real (and nominal) bond yields. Traditional yield-based valuation measures such as the Fed
Model have implied large upside to equity prices for the better part of three years due to low government and corporate bond yields but an exceptionally high S&P 500 earnings yield. This is the case using US Treasury yields, corporate bond yields or TIPS.

However, bonds may prove to be the mispriced asset class and the relationship between bonds and equities over the past decade suggests that higher bond yields are more likely to drive equities higher than continued low bond yields. Portfolio managers with a longer-term investment horizon will find the recently published report by Peter Oppenheimer The long good buy: the case for equities (March 21, 2012), to be of particular interest. The study explores the prospects for future equity returns relative to bonds given current valuation levels and historical returns. The report demonstrates that the ex-post equity risk premium has been strikingly poor in recent years. Annualized 10 and 20 year relative returns of equities versus bonds have been at their most negative for more than a century, suggesting equities will be the better-performing asset class during the next several years as the equity risk premium normalizes.

Goldman Sachs Global Economics, Commodities and Strategy Research

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Disclosure Appendix

Reg AC
We, David J. Kostin, Amanda Sneider, CFA, Stuart Kaiser, CFA, Peter Lewis and Ben Snider, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Disclosures
Distribution of ratings/investment banking relationships
Goldman Sachs Investment Research global coverage universe
Rating Distribution Investment Banking Relationships

Buy

Hold

Sell

Buy

Hold

Sell

Global 30% 55% 15% 47% 42% 34% As of January 16, 2012, Goldman Sachs Global Investment Research had investment ratings on 3,593 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.

Disclosures required by United States laws and regulations

See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/comanaged public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs usually makes a market in fixed income securities of issuers discussed in this report and usually deals as a principal in these securities. The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be associated persons of Goldman, Sachs & Co. and therefore may not be subject to NASD Rule 2711/NYSE Rules 472 restrictions on communications with subject company, public appearances and trading securities held by the analysts.

Additional disclosures required under the laws and regulations of jurisdictions other than the United States
The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws and regulations. Australia: Goldman Sachs Australia Pty Ltd and its affiliates are not authorised deposit-taking institutions (as that term is defined in the Banking Act 1959 (Cth)) in Australia and do not provide banking services, nor carry on a banking business, in Australia. This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act, unless otherwise agreed by Goldman Sachs. Brazil: Disclosure information in relation to CVM Instruction 483 is available at http://www.gs.com/worldwide/brazil/area/gir/index.html. Where applicable, the Brazil-registered analyst primarily responsible for the content of this research report, as defined in Article 16 of CVM Instruction 483, is the first author named at the beginning of this report, unless indicated otherwise at the end of the text. Canada: Goldman, Sachs & Co. has approved of, and agreed to take responsibility for, this research in Canada if and to the extent it relates to equity securities of Canadian issuers. Analysts may conduct site visits but are prohibited from accepting payment or reimbursement by the company of travel expenses for such visits. Hong Kong: Further information on the securities of covered companies referred to in this research may be obtained on request from Goldman Sachs (Asia) L.L.C. India: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (India) Securities Private Limited; Japan: See below. Korea: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. New Zealand: Goldman Sachs New Zealand Limited and its affiliates are neither "registered banks" nor "deposit takers" (as defined in the Reserve Bank of New Zealand Act 1989) in New Zealand. This research, and any access to it, is intended for "wholesale clients" (as defined in the Financial Advisers Act 2008) unless otherwise agreed by Goldman Sachs. Russia: Research reports distributed in the Russian Federation are not advertising as defined in the Russian legislation, but are information and analysis not having product promotion as their main purpose and do not provide appraisal within the meaning of the Russian legislation on appraisal activity. Singapore: Further information on the covered companies referred to in this research may be obtained from Goldman Sachs (Singapore) Pte. (Company Number: 198602165W). Taiwan: This material is for reference only and must not be reprinted without permission. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. United Kingdom: Persons who would be categorized as retail clients in the United Kingdom, as such term is defined in the rules of the Financial Services Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are available from Goldman Sachs International on request.

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European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/126/EC is available at http://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection with Investment Research. Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer under the Financial Instrument and Exchange Law, registered with the Kanto

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Ratings, coverage groups and views and related definitions

Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment recommendations focused on either the size of the potential return or the likelihood of the realization of the return. Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership. Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation. Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman

Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.

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The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd (ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Ttulos e Valores Mobilirios S.A.; in Canada by Goldman, Sachs & Co. regarding Canadian equities and by Goldman, Sachs & Co. (all other research); in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union.
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General disclosures
This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgment. Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research Division. Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org). Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and our proprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. The analysts named in this report may have from time to time discussed with our clients, including Goldman Sachs salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analysts' published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analysts' fundamental equity rating for such stocks, which rating reflects a stock's return potential relative to its coverage group as described herein. We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if

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appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at http://www.theocc.com/about/publications/character-risks.jsp. Transaction costs may be significant in option strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation will be supplied upon request. In producing research reports, members of the Global Investment Research Division of Goldman Sachs Australia may attend site visits and other meetings hosted by the issuers the subject of its research reports. In some instances the costs of such site visits or meetings may be met in part or in whole by the issuers concerned if Goldman Sachs Australia considers it is appropriate and reasonable in the specific circumstances relating to the site visit or meeting. All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our research by third party aggregators. For all research available on a particular stock, please contact your sales representative or go to http://360.gs.com. Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY 10282. 2012 Goldman Sachs. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc.

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