Nicole Fox: 2008 2008 Year-End Fair Value

2008 年 6 月 27 日美国：投资组合策略
美国：投资组合策略
下半年展望
宏观经济观察：通胀、消费、增长高思庭
今年下半年期间，四大宏观题材应会推动市场及行业回报率：(1) 商品价格上涨； (212) 902-6781 | david.kostin@gs.com
高盛集团
(2) 消费疲软；(3) 财政激励措施；(4) 全球经济增长。在此宏观环境下，IT、能源
及原材料股受益最大。
Nicole Fox
(212) 357-1744 | nicole.fox@gs.com
盈利：市场预测过于乐观，将出现进一步下调高盛集团
我们认为市场对于 2008 年每股盈利的预测过于乐观，我们维持对标普 500 指数

Caesar Maasry
成分股 78 美元的每股盈利预测（较市场预测的 88 美元低 12%）。年初以来，盈 (212) 902-9693 | caesar.maasry@gs.com
利预测已经被下调了 11%，并且还将出现进一步下调。我们的 2009 年每股盈利高盛集团
预测为 83 美元，较市场预测的 106 美元低 22%。
Anders Nielsen
(212) 357-6003 | anders.e.nielsen@gs.com
估值：合理价值为 1400 点，达到的路径不确定高盛集团
我们常使用的股息贴现模型估值方法表明，标普 500 指数 2008 年底的合理价值
为 1400 点，意味着较目前水平存在着约 6-8%的上行空间。 Amanda Sneider
(212) 357-9860 | amanda.sneider@gs.com
高盛集团
执行：行业与题材股票组合
行业：高配 IT 股、能源股及原材料股，低配可选消费品股及金融股。题材：(1)
美国以外地区销售收入比例较高的企业股票 (彭博代码<GSTHINTL>)；(2) 资本开
支再投资率较高的企业股票 (<GSTHRINV>)；(3) 股息增长强劲的企业股票
(<GSTHDIVG>)；(4) 对冲基金重点股票组合 (<GSTHHVIP>)。
标普 500 指数正在接近我们所预测的 1400 点的 2008 年底合理价值
150
S&P 500 Total Returns around Recessions
140
130 1990
Indexed S&P 500 Return
120
110
2008 2008
100 Year-End
90 Fair Value
80
70 2001
60
50
Oct
Oct
Apr
Apr
Apr
Jul
Jul
Jul
Jan
Jan
Jan
资料来源：高盛研究
高盛集团与本研究报告所分析的企业存在业务关系，并且继续寻求发展这些关系。因此，投资者应当考虑到本公司可能存在可能影响本报告客观性
的利益冲突，不应视本报告为作出投资决策的唯一因素。有关分析师的申明，见信息披露之前的部分，其他重要披露信息请参阅
www.gs.com/research/hedge.html。由非美国附属公司聘用的分析师无须参加纳斯达克/纽约证券交易所的分析师考试。
高盛集团
高盛策略研究全球投资研究
1
June 27, 2008 United States: Portfolio Strategy
United States: Portfolio Strategy
Second-half Playbook
Macro Watch: Inflation, Consumer, Growth David J. Kostin

Four macro themes should drive the market and sector returns during (212) 902-6781 | david.kostin@gs.com
Goldman, Sachs & Co.
the second half of the year: (1) commodity inflation, (2) consumer
weakness, (3) fiscal stimulus, and (4) global growth. Info Tech, Energy,
Nicole Fox
and Materials are best positioned given the macro environment. (212) 357-1744 | nicole.fox@gs.com
Earnings: Estimates too optimistic, will fall
Caesar Maasry
We believe 2008 consensus EPS estimates are too optimistic and (212) 902-9693 | caesar.maasry@gs.com
maintain our $78 estimate for the S&P 500 (12% below consensus of Goldman, Sachs & Co.
$88). Earnings have already been revised down 11% YTD. More cuts
will come. Our 2009 EPS forecast of $83 is 22% below $106 consensus. Anders Nielsen
(212) 357-6003 | anders.e.nielsen@gs.com
Valuation: Uncertain path to fair value of 1400
Our preferred valuation approach, the Dividend Discount Model, Amanda Sneider
(212) 357-9860 | amanda.sneider@gs.com
suggests a S&P 500 year-end 2008 fair value of 1400. This implies
approximately 6-8% upside from current levels.
Implementation: Sectors and thematic baskets

Sectors: Overweight Information Technology, Energy, and Materials.
Underweight Consumer Discretionary and Financials. Themes: (1) High
percentage of non-US sales (Bloomberg <GSTHINTL>); (2) High capex
reinvestment rates (<GSTHRINV>); (3) Strong dividend growth
(<GSTHDIVG>); (4) Hedge fund very important positions (<GSTHHVIP>).
S&P 500 heading towards our 2008 year-end fair value estimate of 1400
150
S&P 500 Total Returns around Recessions
140
130 1990
120
110
2008 2008
100 Year-End
90 Fair Value
80
70 2001
60
50
Oct
Oct
Apr
Apr
Apr
Jul
Jul
Jul
Jan
Jan
Jan
Source: Goldman Sachs Research.

The Goldman Sachs Group, Inc. 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, see the text preceding the disclosures. For other important disclosures go to
www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not required to take the NASD/NYSE analyst exam.
The Goldman Sachs Group, Inc. Global Investment Research

Goldman Sachs Strategy Research 1
Table of contents
Bottom Line 3
Positioning for the second-half of 2008 4
Economic Backdrop 6
Inflation 7
The Consumer and Fiscal Stimulus 9
Global Growth 10
Earnings Part I: The Consensus View 12
Earnings Part II: The Goldman Sachs View 13
Valuation triangulation 14
Turning Cash into Value: How companies will spend money in 2008 17
Our Sector Recommendations vs. Mutual Funds vs. Hedge Funds 19
Financials 21
Energy 24
Appendix A: S&P 500 Market cap & net income by sector since 1974 25
Appendix B: Current Aggregate Valuation Metrics 26
Appendix C: Equations behind our Top-Down Earnings Model 27
Appendix D: Goldman Sachs Portfolio Strategy Baskets 28
Disclosures 29

Bottom Line
1. Four macroeconomic themes should drive the market and sector returns
during the second half of the year: (1) inflation, (2) consumer weakness, (3)
fiscal stimulus, and (4) global growth.
2. Goldman Sachs Economics expects anemic GDP growth over the next 12
months. Our economics team expects the US economy to expand by just 1.5% in
2008 and 1.1% in 2009. We expect the unemployment rate will rise from current 5.5%
to 6.2% in 2009. Fed Funds will remain unchanged at 2.0% through 2009.
3. Rising commodity prices have shifted the focus of investors to inflation

concerns. Energy, Materials and Information Technology stocks will benefit.
Prior periods of accelerating commodity inflation have coincided with falling operating
margins, P/E multiple contraction, and low equity returns. Energy stocks strongly and
consistently outperformed, along with Materials. Financials consistently lagged.
4. The US consumer will continue to suffer, despite a brief boost from the
fiscal stimulus, putting pressure on Consumer Discretionary and Consumer
Staples stocks. Falling home prices, soaring food and energy costs, and rising credit
card delinquencies should continue to suppress consumer spending and sentiment.
5. The growth differential between the US and developing world favors stocks
with international revenue exposure. The three S&P 500 sectors with the greatest
percentage of international revenues are Information Technology (55%), Energy (45%),
and Materials (41%).
6. Consensus earnings estimates are too optimistic for 2008 and 2009. Our 2008
S&P 500 EPS estimate of $78 per share is 12% below consensus and implies -5.5%
year/year growth. We expect 2009 EPS will rise 6.4% to $83 but we remain $23 per
share or 22% below the current bottom-up consensus estimate of $106 per share.
7. Our estimate for the S&P 500 2008 year-end fair value is 1400. Using our top-
down earnings estimates and three valuation approaches, we arrive at a year-end fair
value range of 1400-1470. Our preferred valuation approach, the Dividend Discount
Model, suggests a year-end 2008 fair value of 1400.
8. The challenging macro and market environment should result in more

conservative capital usage policies. We estimate that S&P 500 companies will
return less capital to shareholders via buybacks and dividends in 2008-2009 than they
have in recent years.
9. Strong headwinds still exist for the Financials sector. Our Banks research team
expects credit losses will not peak until 1Q 2009. Capital raising to repair balance
sheets will become increasingly difficult to accomplish. Financials account for 55% of
the $1.9 trillion decline in the equity cap of the S&P 500 over the past 12 months.
10. Implementation ideas
Sectors: Overweight: Information Technology, Energy, and Materials.

Underweight: Consumer Discretionary and Financials.
Themes: (1) Long high percentage of non-US sales (Bloomberg <GSTHINTL>)

(2) Long high capex reinvestment rates (<GSTHRINV>)
(3) Long dividend growth (<GSTHDIVG>)
(4) Long hedge fund important positions (<GSTHHVIP>)

Positioning for the second-half of 2008

Four macroeconomic themes will drive the overall market and relative sector returns
during the next several months: (1) inflation, (2) consumer weakness, (3) global
growth, and (4) fiscal stimulus. The Energy, Materials, and Information Technology
sectors will likely outperform in such an environment while Financials and Consumer
Discretionary will lag (see Exhibit 1).
Inflation. Commodities prices continue to set new record highs on an almost daily basis.
An intense debate has erupted among market participants as to whether we are
experiencing a commodities boom or bubble. Goldman Sachs Commodities Research
argues the jump in raw materials prices is fundamentally-driven given the inability of
producers to bring on new supply to meet the increased demand. The Commodities
Research team forecasts average 2008 prices for a variety of energy, industrial metals, and
agricultural raw materials will be 50% above the 2007 average. Inflation at the consumer
level (headline and core CPI) should remain under control given housing is 42% and 50%
of the index, respectively. Home prices are deflationary, falling at a 15% annual rate. It is
the PPI “crude materials” inflation that matters in the current equity market (see page 7).
Consumer weakness. Firms now routinely acknowledge weakening end-market demand

and “trading down” by consumers. In addition to surging energy and food prices, credit
availability remains tight. Housing markets are in full retreat on a national scale. Personal
finance sentiment is the lowest in 30 years. Unemployment recently jumped to 5.5%.
Mortgage and credit card delinquencies are rising. Simply put, these trends will negatively
affect the business prospects of firms in consumer-facing sectors (see page 9).
Fiscal stimulus. Although the fiscal stimulus has prompted spending in the near term,
the longer-term prospects for the consumer remain poor. Consumer Staples companies
should perform better than Consumer Discretionary as consumers focus their limited
resources on necessities. We see little to sustain let alone kick-start a new round of
consumer spending after the tax rebate checks have been spent (see page 9).
Global growth. Global economic activity is slowing. Goldman Sachs Economics expects
world real GDP growth to decelerate from 3.9% in 2007 to 3.1% in 2008 and 3.2% in 2009.
US GDP will slow from 2.2% in 2007 to 1.5% in 2008 and 1.1% in 2009. Firms with high
non-US sales are better positioned relative to domestically-oriented firms. A weak dollar
should also drive sales outside the US. Information Technology (55%), Energy (45%) and
Materials (41%) have above-average foreign sales compared with the S&P 500 at 22%.
Exhibit 1: Impact of macroeconomic themes by sector
as of June 24, 2008
Macroeconomic Themes Valuation Sector Weightings
Consumer Global Fiscal S&P Goldman Overweight /
Inflation Weakness Growth Stimulus Growth Value Overall 500 Sachs Underweight
Info Tech + ─ + + + ++ 16.6% 18 % 142 bp
Energy ++ + + ++ 15.6 17 + 136
Materials ++ + ++ 3.8 5 116
Health Care + + 11.6 12 42
Consumer Staples + ─ + + 10.7 11 27
Telecom Services ── ─ + ─ 3.2 3 0 (23)
Industrials + + 11.3 11 (29)
Utilities ─ ─ ─ ─ 3.9 3 (91)
Consumer Discretionary ─ ─ + ─ ─ ── 8.2 7 (121)
Financials ── ─ ─ ─ ── 15.0 13
- (199)
Source: IDC and Goldman Sachs Research.

We believe consensus bottom-up EPS estimates for the S&P 500 of $88 for 2008 and
$106 for 2009 are too optimistic. Analyst estimates are currently 13% and 28% above our
top-down EPS profit forecasts of $78 and $83, respectively. We expect consensus
estimates will be revised downward as the impact of commodity inflation, consumer
weakness, and slowing US growth limits sales and margins. The fiscal stimulus will likely
provide some support for Consumer Discretionary and Consumer Staples companies
during 2Q and 3Q 2008, but will not nearly be enough to offset the weakness in overall
consumer spending driven by falling house prices, rising food and energy costs, and
historically low sentiment levels. Our top-down EPS estimates imply -5.5% and +6.4%
annual growth in 2008 and 2009, respectively, compared with +7.2% and +20.2% for
consensus bottom-up forecasts (see Exhibits 2 and 21).
Exhibit 2: Consensus estimates continue to fall Exhibit 3: S&P 500 moving sideways toward fair value
150
105 S&P 500 Total Returns around Recessions
140
2008 EPS
Indexed EPS Estimate (100 = First Estimate)
100 (Consensus Bottom -Up) 130 1990

95 120
1990 EPS 110

90 2008 2008
TODAY Goldman Sachs 100 Year-End
85 2001 EPS 2008 EPS estimate
90 Fair Value
(Indexed relative to
80 Consensus) 80
70 2001
75
60
70 Estim ates
Introduced 50
Oct
Oct
Apr
Apr
Apr
Jul
Jul
Jul
Jan
Jan
Jan
65
Oct
Oct
Apr
Apr
Apr
Jul
Jul
Jul
Jan
Jan
Jan
1989 1990 1991

1989 1990 1991
2000 2001 2002
2000 2001 2002
2007 2008 2009
2007 2008 2009
Source: FirstCall and Goldman Sachs Research. Source: FirstCall and Goldman Sachs Research.
Using our top-down earnings estimates, a combination of three valuation approaches

suggests a year-end 2008 fair value of 1470. Our preferred valuation method, the
Dividend Discount Model, suggests a year-end 2008 fair value of 1400. We expect the
US equity market to be largely range-bound through year-end, as weak earnings and
limited potential for multiple re-rating keep prices close to current levels. Energy, Materials,
and Information Technology stocks should lead the market while Financials and Consumer
Discretionary should produce the weakest relative performance.
Exhibit 4: Triangulation of 3 valuation approaches to S&P 500 Fair Value

as of June 23, 2008
S&P 500 Year-End 2008 Fair Value

GS Consensus
Methodology Top-down Bottom-up
Fed model 1520 1810
Reversion of P/E multiple to 10-year history 1490 1930
10-year Dividend Discount Model (DDM) 1400 1630
Assumptions: 4% ERP, 6.7% long term EPS growth, 4.5% risk free rate
Average S&P 500 Fair Value (using above 3 approaches) 1470 1790
Current S&P 500 level 1318 1318
Upside / (Downside) to DDM Fair Value 6% 24%
Upside / (Downside) to Average S&P 500 Fair Value 12 36

Economic Backdrop
Our Economics team forecasts a challenging economic environment over the next 12
months, characterized by anemic GDP growth, declining consumer spending, further
deterioration in housing prices, and rising unemployment. Goldman Sachs currently
expects the US economy to expand by 1.5% in 2008 and by 1.1% in 2009. Unemployment
is expected to rise to 5.4% in 2008 and 6.2% in 2009 (see Exhibit 5).
However, an annual forecast does not tell the complete story. We expect US Real GDP
growth (quarter/quarter annualized) to be flat in 2Q 2008 and then jump to 2.0% and 1.0%
in 3Q and 4Q, respectively, as a result of the fiscal stimulus which is now more than 50%
distributed. Recent strength in Retail Sales data suggests that the stimulus checks are
being spent as expected and should provide a short-term boost to overall spending and
growth. Historically low levels of consumer sentiment, rising unemployment, and falling
home prices, however, suggest that consumer spending will decline significantly in late
2008 and early 2009 in the wake of the stimulus checks.
The potential exists for a “double-dip” slowdown in the first half of 2009 as the
temporary effects of the stimulus package subside. Goldman Sachs Economics
forecasts annualized US economic growth of 0.0% in 1Q 2009 and 1.0% in 2Q 2009.
Exhibit 5: Economic growth slowing Exhibit 6: Double dip is possible

year/year quarterly real GDP growth expectations
US Economic Growth 2007 2008E 2009E 3.5 %

Real GDP 2.2% 1.5% 1.1% Double-dip recession remains a possibility
3.0 %
Consumer Spending 2.9 1.3 0.3
US GDP Growth (%)
Business Fixed Investment 4.7 2.2 (3.6) 2.5 %

Residential Investment (17.0) (21.8) (6.4) 2.0 %
Consumer Prices 2.9% 4.1% 3.2%
1.5 % 3.0
Core CPI 2.3 2.3 2.3
Unemployment Rate 4.6 5.4 6.2 1.0 % 2.0 2.0
0.5 % 1.0 1.0 1.0

Fed Funds Rate 4.3 2.0 2.0
0.0 0.0
10-year Treasury Rate 4.0 3.9 4.2 0.0 %
Q1E Q2E Q3E Q4E Q1E Q2E Q3E Q4E
2008 2009
Source: Goldman Sachs Research. Source: Goldman Sachs Research.
Exhibit 7: Consumer sentiment down Exhibit 8: Unemployment rate jumped to 5.5% in May
U of Michigan Personal Finance Sentiment
150 12
10.8
U. of Michigan Personal Finances 11
140
10 Unemployment Rate
130
9
120 7.7 7.7

8
110 7
6.2
105 6 5.5
100
98 5
90
90 4 Forecast
Recession Recession
80 3
Jan-78
Jan-80
Jan-82
Jan-84
Jan-86
Jan-88
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-78
Jan-80
Jan-82
Jan-84
Jan-86
Jan-88
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Source: University of Michigan. Source: Bureau of Labor Statistics.

Inflation
Rapidly rising commodity prices have shifted the focus of investors and
policymakers from growth to inflation concerns. Goldman Sachs Commodities
Research currently expects many Energy, Metals and Agriculture commodity prices to
jump by an average of 50% in 2008 vs. last year. Prior periods of commodity inflation
coincided with falling operating margins, P/E multiple contraction, and low equity returns,
and we expect this time to be no different.
Evidence certainly exists that inflation is rising on many levels. Both headline and
core CPI have risen during the past six months. The Fed’s preferred measure of inflation,
the PCE deflator, has risen above its 1%-2% comfort zone. The latest CPI release showed
year/year consumer price inflation running at 4.2%, and it has been below 2% only three
months out of the last four years. Commodity prices have soared to new records, with PPI
“crude materials” inflation currently running at 42% year/year (see Exhibit 10).
Exhibit 9 shows the 3, 6, and 12-month forecasts by Goldman Sachs Commodity Research
for nine key energy, industrial metals, precious metals, and agricultural commodities. The
forecasted year/year price increases average 50%.
Exhibit 9: Commodity prices are expected to rise by an average of 50% from 2007-2008
Price Forecasts Average Increase
units 1Q 08 3m 6m 12m 2008 vs. 2007 (%)
Energy
WTI Crude Oil $/bbl 97.77 135.12 145.31 144.46 81 %
NYMEX Nat. Gas $/mmBtu 8.73 12.15 12.70 10.50 59
RBOB Gasoline $/gal 2.48 3.45 3.54 3.81 59
Industrial Metals
LME Copper $/mt 7751 8885 9110 9555 23
London Gold $/troy oz 927 935 910 835 30
London Silver $/troy oz 17.63 17.30 16.80 15.50 27
Agriculture
CBOT Wheat cent/bu 10 1100 1150 1000 31
CBOT Soybean cent/bu 1330 1400 1530 1420 66
CBOT Corn cent/bu 517 650 725 650 73
Average Increase 50 %
Source: Goldman Sachs Commodities Research estimates.
Exhibit 10: Goldman Sachs forecasts PPI Crude Materials to continue to rise in 2008-2009
80
Com ponents of Percent
PPI Crude materials of Total
60 PPI (Crude Materials)
Current = 42% Manufacturing 41%
40 Examples:
Crude petroleum
20 Carbon steel scrap
Construction sand & gravel
0 Aluminum base scrap
Gold ores
(20) Copper ores
Crude foodstuffs & feedstuffs 33
(40)
Periods of accelerating inflation Forecast Crude fuel 26
(60) Construction <1
100%
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
Source: Department of Labor and Goldman Sachs Research.

All inflation is not equal: We focus our analysis on the PPI “crude materials”
indicator, which is more related to commodities inflation than the PPI “finished
goods” or headline or core CPI indicators. During periods of accelerating PPI “crude
materials” inflation, Energy, Materials and Information Technology performed the best
while Financials, Telecom and Consumer Discretionary fared worst. The consistency of
these patterns is notable: Energy and Materials outpaced the market 88% and 75%,
respectively, of the 80 months since 1975 when PPI “crude materials” was accelerating
while Financials outperformed just 38% of the time (see Exhibit 11).
Operating margins tend to contract, especially in the Energy and Telecom sectors.
Industrials and Info Tech margins do not appear as sensitive to inflation. Except for
Materials, P/E multiples tend to contract across the market during periods of accelerating
commodities inflation, most notably in Information Technology and Health Care.
Exhibit 11: Rising PPI (crude materials) inflation dampens margins, multiples, returns
Periods of Accelerating PPI "Crude Materials" Inflation

Operating Hit Rate
Margin P/E Average of out-
Change Change Return performance
Energy (175) bp (2)% 18 % 88 %
Materials (81) 7 12 75
Information Technology (52) (7) 7 63
Consumer Staples (93) (5) 7 88
Industrials (36) (2) 5 38
Health Care (81) (7) 4 63
S&P 500 (86) (5) 4 -
Utilities NA (2) 2 50
Consumer Discretionary (102) (1) 1 38
Telecom Services (151) (6) 1 50
Financials NA (4) (3) 38
Source: Compustat and Goldman Sachs Research.
Regardless of the inflation measure, Energy and Information Technology

historically outperformed during rising inflationary periods, while Financials and
Consumer Discretionary lagged. From a valuation perspective, Materials and
Consumer Discretionary P/E multiples contracted the least, while Information Technology
and Health Care stocks exhibited the most multiple contraction. We believe multiples for
Materials expanded slightly due to outperformance, whereas Consumer Discretionary
multiples remained steady from a combination of declining prices and significant negative
earnings revisions.
Inflationary pressures are likely to weigh on margins. Historically, Consumer

Discretionary and Telecom Services have experienced the sharpest operating margin
contraction during accelerating inflationary periods, while Info Tech and Materials
companies have enjoyed stable margins. Surprisingly, Energy companies tend to exhibit
shrinking margins as well, perhaps attributed to a lag in pricing or shrinking crack spreads.
We recommend investors concerned about inflation and corporate margins consider a

basket of stocks likely to maintain robust margins versus a basket of stocks likely to
experience fragile margins (Bloomberg tickers: <GSTHRMAR> and <GSTHFMAR>. For
more information, please read our report A Strategist’s Map to Margin Declines, published
April 20, 2008.

The Consumer and Fiscal Stimulus

The US consumer is facing a near-perfect storm of rising unemployment, falling
home prices, soaring food and energy costs, and stagnant wage growth. The
fiscal stimulus is the only bright spot in this otherwise dour picture. The
pressures on the consumer have already manifested in rising credit card delinquencies
and historically low levels of consumer sentiment.
Exhibit 12: Home prices continue to decline Exhibit 13: Credit Card delinquency on the Rise
20%
Current slow dow n
5.5
15%
Loan Delinquency Rate, Credit Cards (SA, %)
10% 5.0
S&P/Case-Shiller
5%
20-city Home Price Index
4.5
% year/year
0%
(5)% 4.0
(10)%
Actual Recession 3.5

(15)% April
(15.3)%
(20)%
3.0
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Mar-91
Mar-92
Mar-93
Mar-94
Mar-95
Mar-96
Mar-97
Mar-98
Mar-99
Mar-00
Mar-01
Mar-02
Mar-03
Mar-04
Mar-05
Mar-06
Mar-07
Mar-08
Mar-09
Source: Haver and Goldman Sachs Research. Source: Haver and Goldman Sachs Research.
The impact of the fiscal stimulus is already apparent, with 66% or $71 billion of
an estimated total of $107 billion in rebate checks now distributed. The remaining
$36 billion should be distributed by mid-July, at the latest. The rebate checks will be
reflected in total cash income for US households and will likely boost discretionary cash
flow 1% year/year in 2Q 2008. The impact on discretionary cash flow is expected to be
temporary, however, and should return to -1% year/year by 3Q 2008.
While the impact of the fiscal stimulus on financial performance will not be
known until 2Q and 3Q 2008 earnings are reported, the short-term boost in
spending may have already benefited Consumer Discretionary equities. Following
the first 10 weeks of 2008 in which the S&P 500 Consumer Discretionary sector fell 10%,
the sector rose 14% peak to trough from mid March to early May, just as the first stimulus
checks were distributed or spent by eager consumers in advance of receipt.
Exhibit 14: Rebate was priced into Consumer Discretionary stocks before checks arrived
290 25
S&P 500 Consumer Discretionary, LHS

Stimulus Payments ($billion)
280 20
+14%
Total Return Level
(12)%
270 15
260 10
250 5
$71Bn in total stimulus checks YTD, RHS

240 0
5-May-08
12-May-08
19-May-08
26-May-08
3-Mar-08
10-Mar-08
17-Mar-08
24-Mar-08
31-Mar-08
7-Apr-08
14-Apr-08
21-Apr-08
28-Apr-08
31-Dec-07
7-Jan-08
4-Feb-08
2-Jun-08
9-Jun-08
14-Jan-08
21-Jan-08
28-Jan-08
11-Feb-08
18-Feb-08
25-Feb-08
16-Jun-08
23-Jun-08
Source: Department of the Treasury, FactSet and Goldman Sachs Research.

Global Growth
Goldman Sachs Economics expects Real GDP growth to be significantly higher
outside of the US in 2008 and 2009, with a differential between World GDP
growth and US GDP growth averaging 1.9pp. This gap in expected growth supports
our now long-held view that firms with high non-US sales are better positioned relative to
domestically-oriented companies. Faster economic growth abroad leads to higher
earnings growth for companies with a large fraction of revenues generated internationally.
Regardless of the dismal equity performance around the globe, relatively high GDP growth
outside the US should continue to serve as a source of support for selected US companies.
Exhibit 15: Growth dynamics shifting as US growth declines and China constitutes the largest share of global growth
Real GDP % y/y
40%
2007 2008 2009
33% Share of 2008 Global Real GDP Growth
China 11.9 10.5 10.0
BRICs 9.5 8.5 8.1 30%
India 9.0 7.8 8.2
Russia 8.1 7.5 7.0 20%
20%
Indonesia 6.3 5.5 5.8
Brazil 5.4 5.2 3.4 11%
10% 9% 7%
South Korea 5.0 4.8 5.3 7%
4%
World 3.9 3.1 3.2 3% 3% 2% 2%
Mexico 3.3 2.8 3.6 0%
Euroland 2.6 1.7 1.6
Brazil
Japan
Indonesia
China
India
Russia
Euroland
Korea
Mexico
USA
Other
South
US 2.2 1.5 1.1
Japan 2.1 1.4 1.5
Source: Goldman Sachs Economics Research.
Buy companies with high international sales; sell those with high domestic
exposure. To capitalize on the differential in national growth rates, we recommend
investors buy our international basket, introduced in February 2006 and updated in July
2007, which identifies 46 S&P 500 companies across nine sectors with the greatest
exposure to international growth (Bloomberg <GSTHINTL>). The median stock in the
basket derives 63% of its revenues from outside the US compared with 22% for the median
S&P 500 stock and 29% for the S&P 500 in aggregate. We believe investors should own
this basket to gain exposure to stronger relative growth overseas. For further details see
Strategy Baskets published June 24, 2008 and Portfolio Passport published July 22, 2007.
Long/short investors should consider shorting our US Weakness basket which

contains 52 stocks with low international sales exposure <GSTHAINT>. We
introduced this basket of stocks with the least exposure to non-US growth in October 2007.
The median stock in the basket derives 0% of its revenues from international sales
compared with 22% for the median S&P 500 company and 29% for the S&P 500 in
aggregate. We recommend investors sell this basket short as a pair-trade with our
international growth basket. The two baskets are created sector-neutral in an attempt to
isolate the international exposure of the underlying equities.

Exhibit 16: Foreign revenues by sector for the S&P 500 Exhibit 17: Relative Performance of Long Int’l Growth
(GSTHINTL) vs. Short Domestic Weakness (GSTHAINT)
Foreign Sales Exposure 130
Sector Median 125
Sector Total Stock
120
Information Technology 55 % 51 %
115
Energy 45 33
Materials 41 40 110
Industrials 34 32 105
Consumer Staples 27 30 100 Relative Performance
Consumer Discretionary 23 15 Long GSTHINTL /
95
Financials 21 2 Short GSTHAINT
90
Health Care 18 33
Utilities 7 0 85
Feb-06
Apr-06
Aug-06
Dec-06
Feb-07
Apr-07
Aug-07
Dec-07
Feb-08
Apr-08
Aug-08
Jun-06
Oct-06
Jun-07
Oct-07
Jun-08
Telecommunication Services 2 0
S&P 500 (sales weighted) 29 % 22 %
Note: Based on 2006 company 10-K filings. Revenues for banks and related
financials are the sum of net interest revenues and gross fee income.
Source: Company 10-K filings, FactSet and Goldman Sachs Research. Source: Bloomberg and Goldman Sachs Research.
The growth differential benefits the international basket. We estimate that

year/year earnings growth increases by 18% for the companies in our
international basket when World GDP increases by 1%, whereas earnings of the
average S&P 500 stock only increases by 10%. This differential contrasts with the
sensitivity of earnings to US GDP growth which is similar for the two groups of stocks.
This relationship shows that at least on an earnings basis the international basket captures
the theme of faster international growth (see Exhibit 18).
Exhibit 18: A 1% increase in World GDP is associated with 18% increase in earnings for
the international basket
Sensitivity of margins, sales and earnings to a 1% move in US and World GDP growth
International Basket S&P 500

US GDP World GDP US GDP World GDP
Margin Change 30 bp 107 bp 49 bp 59 bp
Sales Growth 2% 4% 2% 4%
Earnings Growth 7% 18 % 8% 10 %
We expect the trade may face some headwinds from an appreciating US Dollar,
but we believe this performance will be dominated by the positive effect of consistently
higher GDP growth abroad than in the US. We forecast a 5%-10% return of the long/short
trade over the next 12 months. We estimate that the 5% US Dollar appreciation currently
expected by our foreign exchange strategists would create a headwind worth roughly 3.9%
over the next year. However, we believe this effect is small compared with the potential
impact of differences in forecasted GDP growth for the US and the rest of the world.

Earnings Part I: The Consensus View

Consensus bottom-up estimates predict 7% year/year earnings growth in 2008 and
12% excluding Financials. Despite the 11% negative revisions to annual earnings
expectations year-to-date and our belief that consensus EPS estimates are far too
optimistic in aggregate. We do not anticipate negative revisions for most Energy and
Materials companies. Year-to-date, analysts have actually revised 2Q 2008 Energy
estimates upward by 11%. Materials estimates for 2Q 2008 have risen slightly (+0.6%)
compared with 2Q 2008 estimates for the entire market which are down 12% this year.
Defensive sectors have had stable earnings estimates as well. Full-year 2008 EPS
estimates for Consumer Staples are up slightly YTD (+0.5%) while Utilities and Health Care
sectors are down just 0.9% and 3.0%, respectively. The bulk of negative revisions have
come from Consumer Discretionary and Financials, with downward EPS revisions for
CY2008 of 20% and 40%, respectively.
Exhibit 19: Bottom-up consensus estimates continue to fall; only Energy revisions trading up for 2Q
as of June 23, 2008
105 125
2008 S&P 500 EPS Re v isions by Quarte r 120 2Q 2008 S&P 500 EPS Re v isions by Se ctor
115
100
110
Energy (+11%)
105
95 4Q (-5%) 100
95
3Q (-7%)
90
90 S&P 500
CY08 (-11%) 85
80 (-12%)
2Q (-12%)
85 75 Cons Dis cr
70 (-25%)
65
80
1Q (-21%) 60
55
Financials (-40%)
75 50
8-Feb
22-Feb
8-Aug
8-Feb
22-Feb
8-Aug
4-Apr
18-Apr
28-Dec
2-May
16-May
30-May
11-Jul
25-Jul
4-Apr
18-Apr
28-Dec
2-May
16-May
30-May
11-Jan
25-Jan
13-Jun
27-Jun
11-Jul
25-Jul
11-Jan
25-Jan
13-Jun
27-Jun
7-Mar
21-Mar
7-Mar
21-Mar
Source: FirstCall and Goldman Sachs Research.
Exhibit 20: Consensus bottom-up year/year earnings growth forecasts

as of June 23, 2008
2008E Earnings Growth Annual
1Q 2QE 3QE 4QE 2007 2008E 2009E
Energy 28 % 20 % 47 % 27 % 3% 29 % 8%
Consumer Staples 12 11 11 12 15 13 11
S&P 500 (ex-Financials) 9 7 16 15 9 12 13
Information Technology 9 13 10 12 15 12 17
Materials 5 (1) 10 36 9 11 12
S&P 500 (17) (11) 13 55 (3) 7 20
Industrials 9 4 6 8 12 7 13
Health Care 3 5 5 9 13 5 11
Consumer Discretionary (21) (18) 19 27 (14) 4 28
Utilities 8 2 7 5 11 5 10
Telecom Services 2 (2) (6) (4) 22 (3) 12
Financials (82) (57) 4 NM (35) (14) 62
Source: First Call and Goldman Sachs Research.

Earnings Part II: The Goldman Sachs View

We believe consensus EPS estimates are far too optimistic in aggregate, and
maintain our $78.00 EPS estimate for the S&P 500 for 2008 as compared with the
bottom-up estimate of $88.45. Our top-down EPS estimates imply a modest 5.5% decline
in 2008 and 6.4% growth in 2009 (see Exhibit 21). We expect a 12% reduction in 2008
consensus EPS estimates will take place by year-end. Our 2009 top-down estimate of $83
is $23 per share or 22% below the current bottom-up consensus estimate of $106.
Exhibit 21: Goldman Sachs S&P 500 EPS forecasts Exhibit 22: Consensus falling toward GS forecast
105
2008 EPS
Indexed EPS Estimate (100 = First Estimate)

Goldman Sachs Consensus 100 (Consensus Bottom -Up)
Top-Down Bottom-Up 95
2008E 2009E 2008E 2009E 90 1990 EPS
TODAY Goldman Sachs
Sales Growth 2.1 % 4.7 % 11.4 % 5.0 % 2001 EPS 2008 EPS estimate
85
Net Margin 7.4 7.3 8.3 8.9 (Indexed relative to
80 Consensus)
Earnings Growth (5.5)% 6.4 % 7.2 % 20.2 %
75
EPS Estimate $78.00 $83.00 $88.45 $106.33
70 Estim ates
Introduced
P/E ratio 16.9 x 15.9 x 14.9 x 12.4 x
65
Oct
Oct
Apr
Apr
Apr
Jul
Jul
Jul
Jan
Jan
Jan
1989 1990 1991
2000 2001 2002
2007 2008 2009
Source: FirstCall and Goldman Sachs Research. Source: FirstCall and Goldman Sachs Research.
Below-trend GDP growth and rising commodity inflation should drive down
2008-09 margins, and therefore earnings, and represent key drivers of our
below consensus earnings estimates. Exhibit 23 shows the divergence in EBITDA
margin forecasts between our top-down approach and bottom-up estimates. Appendix C
contains the equations we developed to forecast sales and margins and is discussed in
more detail in our December 2007 report, Earnings & Valuation: Triumph of the Top-Down.
Exhibit 23: Goldman Sachs Top-Down vs. Consensus Bottom-Up margin expectations
20% 9%
19%
Real 7%
Bottom-Up
GDP Growth
18%
S&P 500 EBITDA Margin
EBITDA Margin (LTM)
5%
Real GDP Growth

17%
GS
16% Top-Down 3%
15% GS
Economics 1%
14%
(1)%
13%
Forecast
12% (3)%
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
Source: Compustat, FirstCall and Goldman Sachs Research.

The cost structure of each firm is different. The ultimate margin impact will depend
on where raw materials are sourced, where production takes place, where the final
customer is located, as well as whether any hedges are in place and for how long.
Sustained high commodity prices, a weak US Dollar, and increasing unit labor costs in
China represent production cost increases that are only partly being passed on to
consumers, with the rest of the impact being absorbed in the form of declining margins.

Valuation triangulation
We approach the valuation challenge from three perspectives. The dividend discount
model (DDM) is one element of our three-pronged approach to estimating a fair value for
the S&P 500. We also use a mean reversion of P/E multiple and the Fed model. Each has its
pros and cons.
Based on our top-down earnings estimates, a combination of three valuation

approaches suggests a year-end 2008 fair value of 1470, roughly 12% above today’s
level of the S&P 500 (see Exhibit 24).
The DDM approach by itself suggests a year-end 2008 fair value of 1400. We base our
dividend projections on our top-down earnings forecasts and a modeled payout ratio. The
DDM is our preferred method to gauge the valuation of the S&P 500 because it is not a
relative measure so it does not rely on historical comparisons to calculate a fair value. The
DDM relies less on comparable measures, although the Treasury yield is an important
input into the model.
Exhibit 25 contains our complete DDM model along with sensitivity analysis for various
inputs including long-term EPS growth rate, terminal multiple, equity risk premium (ERP),
and risk-free-rate. Exhibit 26 shows the DDM path of fair value through 2018 using
Goldman Sachs top-down as well as consensus bottom-up EPS and dividend estimates.
Exhibit 24: Triangulation of 3 valuation approaches: Dividend Discount Model, mean

reversion of P/E, Fed Model
as of June 23, 2008
Year-End S&P 500 Fair Value

GS Consensus
Methodology Top-down Bottom-up
Fed model 1520 1810
Reversion of P/E multiple to 10-year history 1490 1930
10-year Dividend Discount Model (DDM) 1400 1630
Assumptions: 4% ERP, 6.7% long term EPS growth, 4.5% risk free rate
Average S&P 500 Fair Value (using above 3 approaches) 1470 1790
Current S&P 500 level 1318 1318
Upside / (Downside) to DDM Fair Value 6% 24%
Upside / (Downside) to Average S&P 500 Fair Value 12 36
The market currently trades at a NTM P/E ratio very near the trailing ten-year average
using the Goldman Sachs top-down EPS estimates for the S&P 500 of $78 for 2008 and $83
for 2009 (see Exhibit 27). However, using consensus bottom-up earnings forecasts the
market appears undervalued from a P/E multiple mean reversion perspective.

Exhibit 25: Dividend Discount Model (DDM) for the Current S&P 500 Fair Value
as of June 23, 2008
S&P 500 Top-Down Dividend Discount Model w
CAGR
2007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E '08E-'18E
Top-down Forecast Dividends $27.73 $28.08 $28.22 $28.64 $29.93 $31.45 $34.28 $37.71 $40.97 $43.71 $46.64 $49.77 5.9%
Annual Dividend Growth (%) 11.4 1.3 0.5 1.5 4.5 5.1 9.0 10.0 8.6 6.7 6.7 6.7
Payout Ratio (%) 33.6 36.0 34.0 30.0 28.0 26.5 27.0 27.5 28.0 28.0 28.0 28.0
EPS ($) 82.54 78.00 83.00 95.45 106.90 118.66 126.97 137.13 146.32 156.12 166.58 177.74 8.6%
Annual EPS Growth (%) (5.9) (5.5) 6.4 15.0 12.0 11.0 7.0 8.0 6.7 6.7 6.7 6.7
Cost of Equity 8.5%

Years from cash flow 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 10.5
Discount factor 0.96 0.88 0.81 0.75 0.69 0.64 0.59 0.54 0.50 0.46 0.42
PV of future dividend $14 $25 $23 $22 $22 $22 $22 $22 $22 $21 $21
Assumptions Decomposition of S&P 500 fair value

Assumed LT EPS growth rate 6.7% 100%
Risk-free rate (a) 4.5% Present Value of Dividends
90%
Equity risk premium 4.00% (2008-2017)
Cost of Equity (risk free rate + ERP) 8.5%
216 16%
80%
70%
Calculation of DCF value
Terminal year multiple (b) 55.6 x 60%
Terminal year value 2765
50%
Present Value of Dividends 1171 84%
PV of terminal year value 1171 (2018+)
PV of dividends years 1-10 216 40%
PV of terminal year value + PV of dividends 1387 30%
S&P 500 DDM Fair Value 1390 20%

Current S&P 500 Price: 1318 10% 1387 100%
Premium / (Discount) to Fair Value (5)%
0%
Sensitivity Analysis
Long Term EPS Growth Terminal Multiple Equity Risk Premium Risk Free Rate
Premium / Premium / Premium / Premium /
Input (Discount) Input (Discount) Input (Discount) Input (Discount)
Value to Fair Value Value to Fair Value Value to Fair Value Value to Fair Value
(5)% (5)% (5)% (5)%
6.25% 13% 45 x 12% 4.50% 18% 4.00% (46)%
6.50 4 50 4 4.25 7 4.25 (22)
Base Case: 6.70 (5) 56 (5) 4.00 (5) 4.50 (5)
6.75 (8) 60 (12) 3.75 (22) 4.75 7
7.00 (23) 65 (21) 3.50 (46) 5.00 18
(a) Current 10-year Treasury yield equals 3.5%.
(b) Terminal multiple calculated as 1 / (cost of equity – long term EPS growth rate).
Alternatively, terminal multiple equals the inverse of the normalized dividend yield.
S&P 500 Bottom-Up Dividend Discount Model w
CAGR
2007A 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E '08E-'18E
Bottom-Up Forecast Dividends $27.73 $28.69 $30.46 $32.85 $34.67 $37.00 $39.48 $42.12 $44.94 $47.95 $51.17 $54.60 6.6%
Annual Dividend Growth (%) 11.4 3.5 6.2 7.9 5.6 6.7 6.7 6.7 6.7 6.7 6.7 6.7
Payout Ratio (%) 33.6 32.4 28.6 29.0 28.6 28.6 28.6 28.6 28.6 28.6 28.6 28.6
EPS ($) 82.54 88.45 106.33 113.45 121.05 129.16 137.82 147.05 156.90 167.42 178.63 190.60 8.0%
Annual EPS Growth (%) (5.9) 7.2 20.2 6.7 6.7 6.7 6.7 6.7 6.7 6.7 6.7 6.7
S&P 500 DDM Fair Value 1530

Current S&P 500 Price: 1318
Premium / (Discount) to Fair Value (16)%
Source: Compustat, FirstCall via FactSet and Goldman Sachs Research.

Exhibit 26: Path of S&P 500 fair value based on top-down and bottom-up dividend growth projections
3500
Path of S&P 500 fair value based on

DDM estimates and assuming S&P 500 Bottom-up
3000
appreciates at the rate of dividend growth 2900
2720
2550
2500 2390
Current Bottom-up 2450
2240
S&P 500 level
Fair Value 2100

1970 2300
2000 2160
1850
1750 2020
1620 Top-down
1530 1860
1500 1690
1550
1390 1400 1420 1480
Current
SPX
(1318) 1000 Current 2008 Year-end
Top-down Top-down
Fair Value Fair Value
500
2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E
Source: Compustat, FirstCall via FactSet and Goldman Sachs Research.
The mean-reversion P/E approach using our top-down earnings estimates suggests
the S&P 500 trades 13% below the year-end 2008 fair value. One drawback to the P/E
reversion model is that it explicitly relies on the assumption that the historical 10-year P/E
is the appropriate “fair value” multiple. This assumption is reasonable in many instances,
but can be problematic when the inflation environment shifts over time or if valuations
were unreasonably extended for part of the 10-year history.
The S&P 500 Index trades 15% below the year-end 2008 fair value according to the
Fed Model. This approach values the S&P 500 by comparing the earnings yield of the S&P
500 and the yield of the 10-year Treasury. The rationale for the model is that investors
ultimately choose whether to invest in equities or bonds, and that the yield differential of
the two assets should be roughly comparable over time. We prefer to use the Fed model
as a barometer of equity valuation instead of focusing on the precise upside/downside
implied by the model.
Exhibit 27: Top-down and bottom-up deviation from fair value using trailing 10-year average P/E
25.0 x
Goldman Sachs Top-

Down
20.0 x 16.9x
P/E (using NTM estimates)
15.0 x
14.4x
Consensus
Bottom-Up
10.0 x
Rolling 10-yr average
5.0 x
Jan-84
Jan-85
Jan-86
Jan-87
Jan-88
Jan-89
Jan-90
Jan-91
Jan-92
Jan-93
Jan-94
Jan-95
Jan-96
Jan-97
Jan-98
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Source: Compustat, FirstCall, IBES and Goldman Sachs Research.

Turning Cash into Value: How companies will spend money in 2008
We expect corporate capital usage will decline by 9% in 2008 following three years of
strong growth as firms operate cautiously in the current economic environment. In
2008, we expect share buybacks to fall by 18%, cash acquisitions to fall by 25%, and
dividends paid to grow by just 1% compared with year-ago levels. All three categories
experienced five years of strong growth from 2003 to 2007. Of the four major uses for
corporate cash, we expect only capex to increase meaningfully, but by just 6%.
Our estimates are consistent with the aggregated bottom-up estimates from our Goldman
Sachs sector analysts and with the commentary we heard from company managements on
their 1Q 2008 earnings conference calls. For the first time in years, many management
teams struck a more cautious tone when discussing their respective capital usage policies.
Many firms cited the uncertain economic outlook and operating environment as reasons to
hold onto their cash. Cash/asset ratios remain at high levels.
The shift towards more conservative capital usage policies was evident in the 1Q 2008
data for capex, cash M&A, share buybacks, and dividends. In the first quarter of 2008,
buybacks declined by 12% year/year and 17% on a sequential quarter/quarter basis. Cash
M&A declined by 13% year/year and 51% quarter/quarter. Only capex held up, rising 9% on
a year/year basis in 1Q 2008. However, capex followed its usual seasonal pattern and fell
by 15% on a quarter/quarter basis. For details see Turning Cash into Value, June 9, 2008.
Since 2003, S&P 500 companies have shifted their capital usage priorities towards
returning cash to investors via buybacks and dividends and away from investing for
growth. This multi-year shift towards returning cash to investors was accompanied by
strong growth in the absolute levels of all four of the major corporate uses of cash:
buybacks, dividends, cash M&A, and capex. Buybacks grew the most in 2007, surging by
26%, to reach $616 billion and a record 37% of total capital usage. Capex grew by a less
impressive 5% year/year to $516 billion, which reduced its proportion of total capital usage
to a record-low 31%. We expect capex to grow as a percentage of total capital usage in
2008-10 as buybacks, cash M&A, and dividends all decline or grow modestly.
Exhibit 28: We estimate that companies will return less capital to shareholders via buybacks and dividends in 2008-10
% of spending labeled within bars
1800 Buybacks
Dividends
1600
Cash Acquisitions
1400 Capital Expenditures 32%
32%
Cash Uses ($ billions)
37% 33%
1200 34%
1000 16%
32% 16%
16%
17%
800 19% 17%
17% 26%
21% 15%
21% 20% 21% 18% 15%
15% 16% 16% 14%
600 23% 16% 24% 15%
18% 16% 18% 16% 19% 22%
17% 13%
18% 17% 18% 11% 10%
400 10% 12%
12% 37%
31% 36% 37%
47% 51% 34%
200 46% 45% 49% 46% 40% 36%
51% 80%
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008E 2009E 2010E
Use of cash:
Invest for Growth 63% 60% 63% 63% 65% 67% 60% 57% 51% 49% 49% 47% 50% 51% 52%
(cap-ex+M&A)
Return to Investors 37% 40% 37% 37% 35% 33% 40% 43% 49% 51% 51% 53% 50% 49% 48%
(buybacks+dividends)
Source: Compustat and Goldman Sachs Research estimates.

Exhibit 29: Capital usage summary, 2006-2010 ($ billions)

2006 2007 2008E 2009E 2010E
Op. Cash Flow (ex-Financials) $901 $1,009 $904 $939 $1,001
Capital Usage
Capital Expenditures $490 $516 $546 $582 $618
Cash Acquisitions 223 274 205 230 258
Share Buybacks 491 616 508 508 533
Dividends 238 260 263 265 269
Total Capital Usage $1,442 $1,667 $1,523 $1,584 $1,677
% y/y growth
Op. Cash Flow (ex-Financials) 1% 12 % (10)% 4% 7%
Capital Usage
Capital Expenditures 20 % 5% 6% 6% 6%
Cash Acquisitions 46 23 (25) 12 12
Share Buybacks 33 26 (18) 0 5
Dividends 14 9 1 0 1
Total Capital Usage 27 % 16 % (9)% 4% 6%
Source: Compustat and Goldman Sachs Research estimates.
We recommend two Goldman Sachs baskets to take advantage of expected 2008 capital
usage trends: the reinvestment basket (Bloomberg <GSTHRINV>) and the dividend
growth basket (Bloomberg <GSTHDIVG>). Both of these baskets have meaningfully
outperformed the S&P 500 since inception (see Exhibit 30).
The reinvestment basket is comprised of 50 companies that we expect will invest an

average of 2.6X their level of annual deprecation during 2008-2009. In January 2007, we
introduced a basket of 25 companies expected to re-invest in their respective businesses at
a high rate as measured by projected capex/depreciation. This basket has outperformed
the S&P 500 index by 18% since inception. We continue to believe firms that re-invest in
their business will likely generate sustainable sales and earnings growth, and that share
prices should follow. Accordingly, we have updated the basket which now contains the top
50 companies in the S&P 500 as measured by 2008-2009 capex/depreciation.
The dividend growth basket consists of 43 stocks that analysts expect will increase
dividends by 10%+ annually from 2008-2010 and have a dividend yield above that of the
S&P 500. In January 2007, we introduced a basket of 28 stocks expected to have strong
dividend growth in the following two years. Since inception, this basket has outperformed
the S&P 500 by 7%. We continue to believe that companies returning cash to shareholders
through strong dividend growth should outperform, particularly given our expectation for
reduced share buybacks in 2008-2010.
Exhibit 30: Reinvestment and dividend growth baskets have outperformed the S&P 500 by 16% and 7% since Jan 2007
Total return data as of June 23, 2008
120
Reinvestm ent
115
14%
110
105
Dividend Grow th
100 3%
GS Baskets Bloom berg Ticker
95 S&P 500
Reinvestment <GSTHRINV>
(4)%
Dividend Grow th <GSTHDIVG>
90
May-07
May-08
Mar-07
Apr-07
Aug-07
Nov-07
Mar-08
Apr-08
Aug-08
Jan-07
Feb-07
Jun-07
Jul-07
Sep-07
Oct-07
Dec-07
Jan-08
Feb-08
Jun-08
Jul-08
Sep-08
Source: Bloomberg and Goldman Sachs Research.

Our Sector Recommendations vs. Mutual Funds vs. Hedge Funds

Financials now accounts for 15.0% of the equity cap of the S&P 500 (down from
21% just one year ago) and we recommend an underweight position of 13%. The
dreadful absolute and relative performance means Financials ranks as the third largest
sector, behind Information Technology (16.6%) and Energy (15.6%).
We recommend a 7% weighting in Consumer Discretionary (vs. S&P 500 weight

of 8.2%) and an 11% weight in Consumer Staples (vs. 10.7% weight for SPX). In
aggregate, we would have an 18% weighting for the overall Consumer versus a combined
weight of 18.9% for the two sectors in the S&P 500. The credit situation facing the
consumer is still deteriorating, house prices are falling sharply, and unemployment is
rising. Consensus EPS growth estimates – while too high across the market in our view –
are particularly optimistic in the back half of 2008 for Consumer Discretionary stocks at
+19% and +27% on a year/year basis for 3Q and 4Q 2008, respectively. We expect a round
of negative EPS revisions.
We recently boosted our allocation in Energy and Materials to maintain an

overweight stance. We have consistently recommended an overweight position in
Energy since 2004. Every time we have increased our weighting, share prices in the sector
have continued to climb (along with the price of oil) and the sector's share of the market
has risen as well. Our suggested weight of 17% compares with a 15.6% weight for the S&P
500. For Materials, we recommend a 5% position versus a 3.8% weight in the S&P 500.
We recommend an 18% weight in Information Technology versus 16.6% for the

S&P 500. In terms of the key macro themes in the market – inflation, consumer weakness,
global growth, and fiscal stimulus – Technology benefits from continued growth outside
the US and it has historically outperformed in high raw materials inflation environments
because its margins have been less sensitive to these input costs.
Exhibit 31: Sector holdings of large-cap core mutual funds and hedge funds
as of June 24, 2008
Goldman Sachs Aggregate Dollars Equal-Weighted Average
S&P Recommendations Mutual Funds Hedge Funds Mutual Funds Hedge Funds
500 diff diff diff diff diff
Information Technology 16.6% 18% 142 bp 19% 241 bp 17% 79 bp 20% 375 bp 19% 245 bp
Energy 15.6 17 136 15 (38) 11 (427) 14 (190) 11 (457)
Materials 3.8 5 116 4 37 8 444 5 72 7 323
Health Care 11.6 12 42 11 (100) 11 (59) 12 51 11 (72)
Consumer Staples 10.7 11 27 10 (64) 5 (567) 10 (80) 4 (668)
Telecom Services 3.2 3 (23) 2 (101) 4 34 2 (84) 3 23
Industrials 11.3 11 (29) 9 (180) 13 180 12 84 13 125
Utilities 3.9 3 (91) 2 (231) 4 (25) 2 (164) 3 (59)
Consumer Discretionary 8.2 7 (121) 10 214 14 609 9 101 15 716
Financials 15.0 13 (199) 17 222 12 (269) 13 (165) 13 (176)
100% 0 bp 100% 0 bp 100% 0 bp 100% 0 bp
Equity Holdings / Funds represented $451 billion $822 billion 229 Funds 755 Funds
Source: Lionshares, IDC via FactSet and Goldman Sachs Research.
Mutual fund and hedge fund holdings may be viewed from two perspectives:
Asset (aggregate dollars) and sentiment (typical fund). Analysis using aggregate
dollars is influenced by the largest funds while analysis on an equal-weighted basis offers
a better perspective on how the typical investor is positioned.
On an aggregate basis, large-cap core mutual funds disagree with us (see Exhibit
31). Analysis of 229 large-cap Core mutual funds with $451 billion of equity assets shows
them to be overweight Financials and Consumer Discretionary compared with the S&P 500
Index and neutral weight Energy. Mutual funds have an overweight position in Information
Technology and that is consistent with our recommendation.

From a sentiment perspective, the equal-weighted average of 229 large-cap core

mutual funds is underweight Financials and Energy. The typical fund is more overweight
Information Technology.
Mutual fund holdings analysis depends on style classification. We include a

holdings analysis of large cap Core, Growth, and Value funds and small-cap core funds
relative to their respective benchmarks at the beginning of each month in our report,
Where to Invest Now.
Hedge funds typically do not manage against a benchmark in terms of sector

allocations. However, analysis of the most recent 13-F filings for 755 funds with $822
billion of long equity assets indicate the funds are underweight Financials versus the S&P
500 in terms of both aggregate assets and the typical fund. Moreover, our analysis of short
positions suggests that hedge funds are actually net short the Financials sector. Having an
underweight or net short position in Financials has been the correct structural trade in
2008 although a few sharp rallies have made it difficult for many hedge fund managers to
maintain the positions.
Exhibit 32: Estimated hedge fund long, short, and net exposure, by sector ($ in billions)
as of March 31, 2008
Overweight / Underweight
Information Telecom Health Consumer Consumer
Materials Technology Industrials Services Energy Utilities Care Discretionary Staples Financials TOTAL
LONG
Stock Positions $68 $143 $108 $29 $94 $30 $90 $118 $42 $101 $833
ETF Positions 1 5 3 1 4 1 2 2 2 5 25
Hedge Fund LONG $69 $148 $110 $30 $97 $31 $93 $120 $44 $106 $858
SHORT
Stock Positions $25 $68 $53 $9 $44 $14 $50 $84 $27 $100 $474
ETF Positions 4 15 8 2 15 3 8 9 6 15 84
Estimated SHORT $29 $83 $61 $11 $59 $16 $58 $93 $34 $116 $558
EXPOSURE
Gross $98 $230 $172 $41 $156 $47 $151 $212 $77 $222 $1,416
Net 41 65 49 19 38 15 35 27 10 (10) 300
% Net Long (Net/Long) 59 % 44 % 45 % 64 % 39 % 48 % 38 % 23 % 24 % (9)% 35 %
Net Sector Weighting (%)

Hedge Fund Net Exposure 14% 23% 17% 7% 13% 5% 12% 9% 4% (3)% 100%
Russell 3000 4 16 12 3 11 4 12 11 10 18 100
Over/(Under)weight 971 bp 691 bp 498 bp 360 bp 195 bp 139 bp (1)bp (155)bp (597)bp (2,099)bp
Source: Lionshares via FactSet, IDC and Goldman Sachs Research.
We recommend buying stocks in which fundamentally-driven hedge funds have a

large stake (Bloomberg <GSTHHVIP>). We define stocks that “matter most” to hedge
funds as the positions that appear most frequently among the top ten holdings within
hedge fund portfolios. For this analysis, we limit our hedge fund universe to those funds
with 10 to 200 distinct equity positions in an attempt to isolate fundamentally-driven
investors from quantitative funds or funds that mirror private equity investments.
Hedge Fund VIP list offers investment ideas and tracks long exposure of hedge
funds. By construction, the VIP list identifies the 50 stocks whose performance will largely
influence the long side of many fundamentally driven hedge funds. This quarter, the
basket turned over more names than usual (18 of 50 stocks were new additions), offering
fresh investment ideas. Since inception in November 2007, the VIP list is down 2.8% vs. a
7.4% decline in the S&P 500. Year-to-date, the VIP list is down 2.9% vs. a 9.3% drop in the
S&P 500.

Financials
We concur with our Financials research team that it is still too early to buy the sector. Our
colleagues on the Goldman Sachs Banks research team recently identified four factors
necessary to spur a turnaround in the Financials sector: a stabilization of credit costs, the
completion of the recapitalization process, a narrowing of consensus earnings ranges, and
a steeper yield curve (see Timing the turnaround: Credit, Capital, Consensus and Curve,
published June 17, 2008). We do not expect losses to peak until 1Q 2009 (see Exhibit 33).
The Banks team forecasts a further rise in nonperforming assets on the back of continued
weakness in the housing sector.
Exhibit 33: Losses are expected to peak in 1Q 2009 Exhibit 34: Capital Raises – only 3 of 42 in-the-money
US banking industry – total loans and leases net charge-offs as of June 23, 3003
2.0% 40%
Average dilution = 17%
1.8%
20% SLM (1)
Total loans and leases - net charge-offs
Forecast
1.6%
NYB SOV NCC (2)
Stock Performance vs. Offering Price

1.4% 0%
SIVB
1.2% PHH
(20)% CIT (1) FHN
1.0%
TSFG WM (2)
0.8% (40)%
CNB Average stock
0.6% EW BC performance = (39)%
(60)% UBS (1)
0.4% W M (1)
NCC (1) ABK
CFC
0.2% (80)% MGIC (2)
MGIC (1)
MBI (1)
TMA
0.0%
(100)%
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
0% 15% 30% 45% 60% 75%

Dilution to e xisting share holders
Source: Federal Reserve and Goldman Sachs Banks Research team estimates. Source: FactSet, Company Releases and Goldman Sachs Research.
The $328 billion in capital raised by global Financials organizations during the recent cycle
is just equal to the gross write-downs over the same period (see Exhibit 35). All the capital
raising has not really improved the ability of financial institutions to make new loans and
lending standards remain tight. The Banks research team forecasts another $65 billion of
capital may be needed, resulting in additional, significant dilution to existing shareholders.
The performance of stocks since they have raised capital has been negative and only 3 of
42 major deals in the Financials space are in-the-money. The average stock performance is
down 39% and the average dilution has been 17% (see Exhibit 34).
During the past 12 months the equity capitalization of the S&P 500 has
decreased by $1.9 trillion and Financials has accounted for $1.1 trillion or 55%
of the total market value decline (see Exhibit 36). Consumer Discretionary stocks
accounted for 23% of the decline.
Exhibit 35: Summary of Global Financials Write-downs and Capital Raising

capital raised and gross write-downs by financials, $ billions; excluding bank provision charges
Gross Write-downs Capital Raised

Rest of Rest of
US Europe the world Total US Europe the world Total
Brokers $ 58 $ 60 $1 $ 119 Brokers $ 32 $ 42 – $ 73

Banks 59 78 13 151 Banks 122 57 5 184
Specialty Finance 36 – – 36 Specialty Finance 48 – – 48
Insurance & Asset Mgr 21 7 – 28 Insurance & Asset Mgr 22 – – 22
Total $ 175 $ 145 $ 14 $ 333 Total $ 224 $ 99 $5 $ 328

Source: Company data and Goldman Sachs Banks Research team.

Exhibit 36: Financials equity market capitalization change over the past 12 months, as of June 24, 2008
29-Jun-07 24-Jun-08 Change from Jun 07 to Jun 08

Equity S&P 500 Equity S&P 500 Equity S&P 500
Mkt Cap Weight Mkt Cap Weight Mkt Cap Weight
($ bil) (%) ($ bil) (%) ($ bil) (%) (bps)
S&P 500 $13,838 100.0 % $11,911 100.0 % ($1,927) (14)% 0 bp

Energy 1,445 10.8 1,802 15.6 356 25 485
Consumer Staples 1,387 9.3 1,380 10.7 (7) (1) 144
Information Technology 2,191 15.4 2,022 16.6 (169) (8) 113
Materials 424 3.1 448 3.8 24 6 72
Utilities 473 3.5 451 3.9 (23) (5) 39
Health Care 1,580 11.7 1,348 11.6 (231) (15) (9)
Industrials 1,551 11.4 1,320 11.3 (231) (15) (13)
Telecommunication Services 504 3.8 371 3.2 (133) (26) (52)
Consumer Discretionary 1,466 10.2 1,015 8.2 (450) (31) (199)
FINANCIALS 2,816 20.8 1,752 15.0 (1,064) (38) (579)
Other Diversified Financial Services 636 4.8 % 351 3.1 % (285) (45)% (170) bp
C Citigroup Inc. 254 1.9 103 0.9 (151) (60) (101)
BAC Bank of America Corp. 217 1.6 119 1.0 (98) (45) (59)
JPM JPMorgan Chase & Co. 166 1.2 130 1.1 (35) (21) (10)
Regional Banks $224 1.7 % $89 0.8 % ($135) (60)% (89) bp

STI SunTrust Banks 31 0.2 13 0.1 (17) (57) (11)
FITB Fifth Third Bancorp 22 0.2 6 0.1 (16) (73) (11)
NCC National City Corp. 19 0.1 4 0.0 (15) (80) (11)
RF Regions Financial Corp. 23 0.2 8 0.1 (15) (66) (11)
MI Marshall & Ilsley Corp. 12 0.1 4 0.0 (8) (65) (5)
KEY KeyCorp 13 0.1 6 0.0 (8) (59) (5)
BBT BB&T Corporation 22 0.2 14 0.1 (9) (39) (5)
ZION Zions Bancorp 8 0.1 3 0.0 (5) (61) (3)
FHN First Horizon National 5 0.0 1 0.0 (3) (70) (2)
HBAN Huntington Bancshares 5 0.0 2 0.0 (3) (61) (2)
MTB M&T Bank Corp. 12 0.1 8 0.0 (3) (30) (1)
PNC PNC Bank Corp. 25 0.2 20 0.2 (4) (18) (1)
CBH Commerce Bancorp Inc. 7 0.1 NA NA NA NA NA
CBSS Compass Bancshares 9 0.1 NA NA NA NA NA
SNV Synovus Financial 10 0.1 NA NA NA NA NA
Investment Banking & Brokerage $342 2.5 % $192 1.6 % ($150) (44)% (89) bp
MS Morgan Stanley 88 0.7 43 0.4 (46) (52) (29)
MER Merrill Lynch 73 0.5 35 0.3 (38) (53) (24)
LEH Lehman Bros. 40 0.3 17 0.1 (23) (58) (15)
ETFC E*Trade Financial Corp. 9 0.1 2 0.0 (8) (83) (6)
SCHW Charles Schwab 26 0.2 24 0.2 (1) (5) 2
BSC Bear Stearns Cos. 17 0.1 NA NA NA NA NA
Thrifts & Mortgage Finance $185 1.4 % $61 0.5 % ($123) (67)% (84) bp
FNM Fannie Mae 64 0.5 24 0.2 (39) (62) (27)
WM Washington Mutual 38 0.3 6 0.1 (32) (84) (23)
FRE Federal Home Loan Mtg. 40 0.3 13 0.1 (27) (68) (19)
CFC Countrywide Financial Corp. 22 0.2 3 0.0 (19) (87) (14)
MTG MGIC Investment 5 0.0 1 0.0 (4) (78) (3)
SOV Sovereign Bancorp 10 0.1 5 0.0 (5) (47) (2)
HCBK Hudson City Bancorp Inc. 7 0.0 9 0.1 2 35 3
Multi-line Insurance $262 1.9 % $139 1.2 % ($122) (47)% (75) bp

AIG American Int'l. Group 182 1.4 80 0.7 (101) (56) (66)
HIG Hartford Financial Svc.Gp. 31 0.2 22 0.2 (10) (31) (4)
GNW Genworth Financial Inc. 14 0.1 8 0.1 (6) (45) (4)
LTR Loews Corp. 27 0.2 21 0.2 (6) (22) (2)
AIZ Assurant Inc. 7 0.0 8 0.1 1 13 1
Diversified Banks $282 2.1 % $178 1.6 % ($104) (37)% (56) bp

WB Wachovia Corp. 98 0.7 38 0.3 (60) (61) (40)
WFC Wells Fargo 117 0.9 83 0.7 (34) (29) (15)
CMA Comerica Inc. 9 0.1 4 0.0 (5) (54) (3)
USB U.S. Bancorp 57 0.4 52 0.5 (5) (9) 3
Source: Compustat, IDC and Goldman Sachs Research.

Exhibit 36 cont'd: Financials equity market capitalization change over the past 12 months, as of June 24, 2008
29-Jun-07 24-Jun-08 Change from Jun 07 to Jun 08

Equity S&P 500 Equity S&P 500 Equity S&P 500
Mkt Cap Weight Mkt Cap Weight Mkt Cap Weight
($ bil) (%) ($ bil) (%) ($ bil) (%) (bps)
Property & Casualty Insurance $179 1.3 % $120 1.0 % ($59) (33)% (29) bp
XL XL Capital 16 0.1 4 0.0 (11) (71) (8)
MBI MBIA Inc. 8 0.1 1 0.0 (7) (86) (5)
ALL Allstate Corp. 37 0.3 26 0.2 (11) (30) (5)
TRV Travelers Cos. Inc. 36 0.3 27 0.2 (8) (24) (3)
CINF Cincinnati Financial 7 0.1 4 0.0 (3) (41) (2)
PGR Progressive Corp. 18 0.1 13 0.1 (4) (25) (2)
CB Chubb Corp. 22 0.2 19 0.2 (3) (14) (0)
SAF SAFECO Corp. 7 0.0 6 0.1 (1) (8) 0
ACE ACE Limited 20 0.2 19 0.2 (1) (6) 1
ABK Ambac Financial Group 9 0.1 NA NA NA NA NA
Consumer Finance $129 1.0 % $82 0.7 % ($47) (37)% (25) bp

AXP American Express 73 0.5 49 0.4 (24) (33) (12)
COF Capital One Financial 32 0.2 15 0.1 (17) (53) (11)
SLM SLM Corporation 24 0.2 10 0.1 (13) (57) (9)
DFS Discover Financial Services NA NA 7 0.1 NA NA NA
Life & Health Insurance $169 1.3 % $136 1.2 % ($32) (19)% (7) bp
PRU Prudential Financial 45 0.3 29 0.3 (16) (36) (9)
LNC Lincoln National 19 0.1 12 0.1 (7) (35) (3)
MET MetLife Inc. 48 0.4 39 0.3 (8) (18) (1)
PFG Principal Financial Group 16 0.1 12 0.1 (4) (24) (1)
UNM UnumProvident Corp. 9 0.1 7 0.1 (1) (17) (0)
TMK Torchmark Corp. 6 0.0 5 0.0 (1) (16) (0)
AFL AFLAC Inc. 25 0.2 30 0.3 5 21 8
Insurance Brokers $30 0.2 % $27 0.2 % ($2) (7)% 2 bp

MMC Marsh & McLennan 17 0.1 13 0.1 (4) (22) (1)
AOC Aon Corp. 13 0.1 14 0.1 2 13 3
REITs / Real Estate $162 1.2 % $146 1.2 % ($17) (10)% 7 bp

HST Host Hotels & Resorts Inc. 12 0.1 7 0.1 (5) (39) (3)
CBG Cb Richard Ellis Group Inc 8 0.1 4 0.0 (4) (50) (2)
DDR Developers Diversified Realty 7 0.0 4 0.0 (2) (34) (1)
AVB AvalonBay Communities 9 0.1 7 0.1 (2) (26) (1)
AIV Apartment Investment & Mgmt'A' 5 0.0 3 0.0 (2) (36) (1)
EQR Equity Residential 13 0.1 11 0.1 (3) (19) (1)
VNO Vornado Realty 17 0.1 14 0.1 (3) (17) (0)
BXP Boston Properties 12 0.1 11 0.1 (1) (7) 1
PCL Plum Creek Timber Co. 7 0.1 7 0.1 0 1 1
KIM Kimco Realty 10 0.1 9 0.1 (1) (6) 1
PSA Public Storage 13 0.1 14 0.1 1 5 2
PLD ProLogis 15 0.1 15 0.1 0 2 2
SPG Simon Property Group, Inc 21 0.2 21 0.2 0 1 3
ASN Archstone-Smith Trust 13 0.1 NA NA NA NA NA
GGP General Growth Properties Inc. NA NA 10 0.1 NA NA NA
HCP Hcp Inc NA NA 8 0.1 NA NA NA
Asset Management & Custody Banks $171 1.2 % $160 1.3 % ($10) (6)% 13 bp
LM Legg Mason Inc 13 0.1 7 0.1 (6) (47) (4)
BEN Franklin Resources 33 0.2 23 0.1 (10) (29) (3)
AMP Ameriprise Financial 15 0.1 10 0.1 (5) (34) (3)
JNS Janus Capital Group 5 0.0 5 0.0 (0) (9) (0)
FII Federated Investors Inc. 4 0.0 4 0.0 (0) (7) 0
NTRS Northern Trust Corp. 14 0.1 16 0.1 2 11 3
TROW T. Rowe Price Group 14 0.1 15 0.1 1 11 3
STT State Street Corp. 23 0.2 29 0.3 6 26 8
BK Bank of New York 31 0.2 47 0.4 15 49 17
ACAS American Capital Strategies Ltd. NA NA 5 0.0 NA NA NA
MEL Mellon Bank Corp. 18 0.1 NA NA NA NA NA
Specialized Finance $47 0.3 % $59 0.5 % $12 27 % 17 bp

CIT CIT Group 11 0.1 2 0.0 (8) (77) (6)
MCO Moody's Corp 17 0.1 9 0.1 (8) (49) (4)
CME Chicago Merc Exch Holdings 19 0.1 24 0.2 5 25 6
ICE IntercontinentalExchange Inc. NA NA 9 0.1 NA NA NA
NYX Nyse Euronext NA NA 15 0.1 NA NA NA
Multi-Sector Holdings NA NA $11 0.1 % NA NA NA bp

LUK Leucadia National Corp. NA NA 11 0.1 NA NA NA
Source: Compustat, IDC and Goldman Sachs Research.

Energy
We have been consistently overweight Energy for four years and believe the
sector will continue to outperform as energy prices continue to rise. Global
demand for energy, limited sources of new supply, and modest availability of alternative
energy sources, should provide continued support for energy prices and US Energy
equities. No spare capacity exists for oil production or refining (see Exhibits 37 and 38).
Simply put, tight markets have led to higher prices.
Our Goldman Sachs Commodities Research team believes fundamental support

exists for energy prices to remain at elevated levels, which should be positive
for Energy equities. Rising long-dated oil prices will continue to provide structural
support to spot WTI prices (see Commodity Watch, June 9, 2008, for more details).
Goldman Sachs Commodities research expects escalating resource

protectionism to constrain expansion in oil production capacity while limited
scalability will prevent near-term substitution from alternative fuels. The currently
low levels of US crude inventories, well below those at summer’s start in years past,
should also support prices over the coming months. Gasoline demand, the most
vulnerable of the energy commodities because of the current pressures on the US
consumer, should find support from the summer driving season and low production levels.
Exhibit 37: Global oil production and capacity Exhibit 38: Global refining capacity
Million barrels per day Million barrels per day
Global production 90
90
Global capacity
Production Global Refining
Capacity Capacity
80 80
70 70 World Petroleum
Demand
Million b/d
60
Million b/d
60
Global output
50
50
40
40 World Petroleum
Supply
30
30
20
66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 20
66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06
Source: IEA, DOE and Goldman Sachs Commodities Research. Source: IEA, DOE and Goldman Sachs Commodities Research
Exhibit 39: Energy has outperformed as oil prices rise Exhibit 40: Oil futures suggest sustained high prices
$140 3.0 150
$120 Oil Price

2.5 125
(left-side axis) Currently: futures prices
$100 converge on $133
Energy vs. S&P 500
Oil Price ($ / bbl.)
2.0 100
$80
Oil Price ($/bl)
$60 75
1.5
$40 Energy vs. Previously: futures prices

S&P 500 50 converged on $18-20
1.0
(right-side axis) regardless of the spot price $37
$20
25
$0 0.5
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
$12
0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Source: Goldman Sachs Commodities Research. Source: Goldman Sachs Commodities Research.

Appendix A: S&P 500 Market cap & net income by sector since 1974
Exhibit 41: Sector composition of the S&P 500 by equity capitalization, 1974-2008
100%
Financials Financials 15%
90% Bubble
22%
80%
Health Care 11%
70%
Tech
60% Bubble Information Tech 17%
32%
50% Consumer Staples 11%
40% Consumer Discretionary 8%
30% Industrials 11%

Telecom Services 3%
20%
Utilities 4%
Energy Materials 4%
10% Bubble
26% Energy 16%
0%
Dec-74
Dec-77
Dec-80
Dec-83
Dec-86
Dec-89
Dec-92
Dec-95
Dec-98
Dec-01
Dec-04
Dec-07
Exhibit 42: Net income contribution by sector to the S&P 500, 1974-2008 (a)
100%
90% Financials Financials 16%

Bubble
80% 31%
70%
Health Care 10%
60% Tech Bubble

Information Tech 13%
16%
50% Consumer Staples 12%
40%
Consumer Discretionary 9%
30% Industrials 12%

Telecom Services 3%
20% Utilities 4%
Energy
Materials 3%
Bubble
10%
26%
Energy 18%
0%
Dec-74
Dec-77
Dec-80
Dec-83
Dec-86
Dec-89
Dec-92
Dec-95
Dec-98
Dec-01
Dec-04
Dec-07
(a) Net income defined as earnings before extraordinary items available to common shareholders. Only positive data points are included.

Appendix B: Current Aggregate Valuation Metrics

Exhibit 43: S&P 500 Sector Valuation Summary
as of June 23, 2008
Current Aggregate Valuation Metrics - Absolute

EV/ EV/ Price/ FCF PEG
Sales EBITDA Book Yield P/E Ratio
S&P 500 1.5x 8.1x 2.5x 5.5% 13.4x 1.1x
Health Care 1.4 8.5 3.1 6.7 13.1 1.1

Information Technology 2.2 10.3 4.1 6.1 16.9 1.0
Telecommunication Services 2.0 5.6 1.8 8.7 12.8 1.5
Energy 1.6 6.4 3.4 4.0 11.1 0.9
Industrials 1.9 9.7 3.0 6.8 13.9 1.1
Consumer Staples 1.3 9.2 3.6 4.9 15.8 1.4
Consumer Discretionary 1.0 7.2 2.1 7.0 15.6 1.2
Materials 1.6 8.8 3.1 3.8 15.2 1.1
Financials NM NM 1.2 NM 10.5 1.0
Utilities NM 8.4 2.2 (1.5) 15.9 1.8
Current Aggregate Valuation Metrics - Relative

EV/ EV/ Price/ FCF PEG
Sales EBITDA Book Yield P/E Ratio
Health Care 0.9 1.0 1.2 1.2 1.0 1.0
Information Technology 1.4 1.3 1.7 1.1 1.3 1.0
Telecommunication Services 1.3 0.7 0.7 1.5 1.0 1.3
Energy 1.0 0.8 1.3 0.8 0.8 0.8
Industrials 1.3 1.2 1.2 1.2 1.0 1.0
Consumer Staples 0.8 1.1 1.5 0.9 1.2 1.3
Consumer Discretionary 0.7 0.9 0.9 1.2 1.2 1.1
Materials 1.0 1.1 1.2 0.7 1.1 1.0
Financials NM NM 0.5 NM 0.8 1.0
Utilities NM 1.0 0.9 (0.3) 1.2 1.6
Current vs. 10-year average (Z-score) (a)

Median
EV/ EV/ Price/ FCF PEG of Six
Sales EBITDA Book Yield P/E Ratio Metrics
S&P 500 (1.0) (2.7) (1.0) (1.3) (1.3) (1.5) (1.3)
Health Care (1.7) (0.9) (1.2) (1.0) (1.8) (0.6) (1.1) Undervalued
Information Technology (0.6) (0.5) 0.3 (0.7) (1.1) (1.0) (0.7)
Telecommunication Services (0.8) 0.5 (0.2) (0.5) (0.8) (0.4) (0.4)
Energy 3.0 0.3 2.5 0.2 0.0 (0.8) 0.3
Industrials 0.8 1.0 1.4 0.2 0.6 (0.5) 0.7
Consumer Staples 0.9 1.5 (1.0) 0.9 0.7 0.3 0.8
Consumer Discretionary (0.7) 1.2 1.4 (1.1) 1.0 1.7 1.1
Materials 1.6 2.5 1.8 1.1 0.9 (0.5) 1.3
Financials NM NM (2.4) NM 1.5 1.6 1.5
Overvalued
Utilities NM 1.9 1.9 (0.1) 1.8 0.3 1.8
(Discount) / Premium vs. 10-yr History (%)

Median
EV/ EV/ Price/ FCF PEG of Six
Sales EBITDA Book Yield P/E Ratio Metrics
S&P 500 (17)% (32)% (27)% (46)% (23)% (13)% (25)%
Health Care (33) (17) (26) (14) (16) (8) (17) Undervalued
Information Technology (12) (12) 7 (13) (22) (20) (13)
Telecommunication Services (10) 9 (6) (52) (11) (12) (11)
Consumer Staples 8 13 (16) 21 6 2 7
Industrials 12 12 15 4 7 (4) 9
Consumer Discretionary (6) 11 15 (35) 13 23 12
Energy 37 8 43 18 0 (23) 13
Financials NM NM (29) NM 14 15 14
Materials 26 36 54 53 18 (12) 31
Utilities NM 35 49 NM 49 10 42 Overvalued
(a) z-score for S&P 500 defined as (current metric minus 10-yr average) / monthly 10-yr standard deviation z-score for sectors defined as (current relative metric minus
10-yr average of relative metric) / monthly 10-yr standard deviation of relative metric
Source: Compustat, FirstCall and Goldman Sachs Research.

Appendix C: Equations behind our Top-Down Earnings Model
Exhibit 44: Equations behind the Goldman Sachs Top-Down Earnings Model
Our estimated regression for quarterly sales growth is:
ΔS t = 0.26+ 1.12 ΔGDPt − 0.11 ΔTWDt + 0.91 ΔPPI t R 2 = 55%

(1.4 ) (8.0 ) ( −2.5 ) ( 9.2 )
Our estimate for EBITDA margin is:
Mart = 3.34+ 0.20 ( ΔGDPt − ΔGDPt ) − .19 ΔCPI t + 0.80 Mart −1 R 2 = 73%
( 4. 0 ) ( 2. 2 ) ( − 2. 0 ) (15.8 )
Subscripts denote quarters.

Δ denotes quarterly changes in a variable.
A bar over a variable denotes a 10 year rolling average.
ΔS is sales growth seasonally adjusted using the X12 procedure from the US Census
Bureau.
GDP is seasonally adjusted real GDP.
Mar denotes EBITDA margin.
Numbers in parenthesis are t-statistics.
For 2008 estimates we substitute Goldman Sachs Economics forecasts for the
macroeconomic variables.
For 2009, we assume PPI inflation reverts to its long-term historical average, the trade-
weighted dollar is flat, and GDP increases at the pace currently forecast by Goldman Sachs
Economics.

Appendix D: Goldman Sachs Portfolio Strategy Baskets
Exhibit 45: Type <GSSU5> for Goldman Sachs US Portfolio Strategy Baskets on Bloomberg
<GSSU5>
Macroeconomic
GSTHINTL
GSTHAINT
GSTHSBAL
GSTHWBAL
GSTHRMAR
GSTHFMAR
GSTHRECN
Use of Cash
GSTHRINV
GSTHDIVG
GSTHDYLD
Hedge Fund
GSTHHVIP
GSTHHFHI
GSTHHFSL
Valuation
GSTHGARP
GSTHSVLU
GSTHAVLU
Demographic
GSTHHPNL
GSTHHPNS
Permission to our GS Portfolio Strategy Baskets

To receive access to the Goldman Sachs US Portfolio Strategy <GSSU5> Bloomberg page, please follow the directions
below:
1. Please go to your Bloomberg terminal and type IAM <go>.
2. Take a screen shot of the page.
3. Send the attachment and an e-mail to your Goldman Sachs salesperson requesting access to the US Portfolio
Strategy Bloomberg <GSSU5> page.
Source: Bloomberg and Goldman Sachs Research.

Reg AC
I, David J. Kostin, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or
companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific
recommendations or views expressed in this report.
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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, if any, 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
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Our rating system requires that analysts rank order the stocks in their coverage groups and assign one of three investment ratings (see definitions
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2008 年 6 月 27 日 美国：投资组合策略

我们认为市场对于 2008 年每股盈利的预测过于乐观，我们维持对标普 500 指数

标普 500 指数正在接近我们所预测的 1400 点的 2008 年底合理价值

United States: Portfolio Strategy

Macro Watch: Inflation, Consumer, Growth David J. Kostin

Implementation: Sectors and thematic baskets

Source: Goldman Sachs Research.

The Goldman Sachs Group, Inc. Global Investment Research

Goldman Sachs Strategy Research 2

3. Rising commodity prices have shifted the focus of investors to inflation

8. The challenging macro and market environment should result in more

10. Implementation ideas

Sectors: Overweight: Information Technology, Energy, and Materials.

Themes: (1) Long high percentage of non-US sales (Bloomberg <GSTHINTL>)

Goldman Sachs Strategy Research 3

Positioning for the second-half of 2008

Consumer weakness. Firms now routinely acknowledge weakening end-market demand

Source: IDC and Goldman Sachs Research.

Goldman Sachs Strategy Research 4

100 (Consensus Bottom -Up) 130 1990

Indexed S&P 500 Return

1990 EPS 110

1989 1990 1991

Using our top-down earnings estimates, a combination of three valuation approaches

Exhibit 4: Triangulation of 3 valuation approaches to S&P 500 Fair Value

S&P 500 Year-End 2008 Fair Value

Goldman Sachs Strategy Research 5

Exhibit 5: Economic growth slowing Exhibit 6: Double dip is possible

US Economic Growth 2007 2008E 2009E 3.5 %

Business Fixed Investment 4.7 2.2 (3.6) 2.5 %

0.5 % 1.0 1.0 1.0

Source: Goldman Sachs Research. Source: Goldman Sachs Research.

120 7.7 7.7

Source: University of Michigan. Source: Bureau of Labor Statistics.

Goldman Sachs Strategy Research 6

Source: Goldman Sachs Commodities Research estimates.

Source: Department of Labor and Goldman Sachs Research.

Goldman Sachs Strategy Research 7

Periods of Accelerating PPI "Crude Materials" Inflation

Source: Compustat and Goldman Sachs Research.

Regardless of the inflation measure, Energy and Information Technology

Inflationary pressures are likely to weigh on margins. Historically, Consumer

We recommend investors concerned about inflation and corporate margins consider a

Goldman Sachs Strategy Research 8

The Consumer and Fiscal Stimulus

Actual Recession 3.5

S&P 500 Consumer Discretionary, LHS

$71Bn in total stimulus checks YTD, RHS

Source: Department of the Treasury, FactSet and Goldman Sachs Research.

Goldman Sachs Strategy Research 9

Source: Goldman Sachs Economics Research.

Long/short investors should consider shorting our US Weakness basket which

Goldman Sachs Strategy Research 10

The growth differential benefits the international basket. We estimate that

International Basket S&P 500

Source: Compustat and Goldman Sachs Research.

Goldman Sachs Strategy Research 11

Earnings Part I: The Consensus View

Source: FirstCall and Goldman Sachs Research.

Exhibit 20: Consensus bottom-up year/year earnings growth forecasts

Source: First Call and Goldman Sachs Research.

Goldman Sachs Strategy Research 12

Earnings Part II: The Goldman Sachs View

2008 年 6 月 27 日美国：投资组合策略