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March 23, 2012

United States

US Equity ViewsPortfolio 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.

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.

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.

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

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

David J. Kostin

(212) 902-6781 [email protected]

Goldman, Sachs & Co.

Amanda Sneider, CFA



Stuart Kaiser, CFA



Peter Lewis



Ben Snider(212) 357-1744 [email protected]


Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investorsshould be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investorsshould consider this report as only a single factor in making their investment decision. For Reg AC certification and otherimportant disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed bynon-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

Change

9-Oct-07 21-Mar-12 Level Percent

Earnings

EPS (LTM) $91 $97 $5 6 %

EPS (NTM) 103 106 3 3

Expected Growth 12.5 % 9.4 % (3.1)pp (25)%

Valuation (NTM P/E) 15.2 X 13.2 X (2.0)X (13)%

S&P 500 Index 1565 1403 (162) (10)%

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March 23, 2012 United States

Goldman Sachs Global Economics, Commodities and Strategy Research 2

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 pathas of March 20, 2012

Exhibit 2:Path of forward P/E multiple during stagnationas of February 29, 2012

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 modelindicates 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.

85

90

95

100

105

110

115

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

IndexedGDPpercapita

Stagnation year

+ 1SD

Japan(1992-2003)

US(2008-2013E)

Average indexedGDP per capita

in 93 stagnations

-1SD

Stagnation starts(GDP = 100)

40

60

80

100

120

140

160

180

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

IndexedNTMP

/E

Stagnation Year

+1 SD

-1 SD

Average indexed

forward P/E in 17OECD stagnations

CurrentUS

Stagnation starts(P/E = 100)

Forecast

14.1x

9.3x

11.8x

18.8x

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Exhibit 3:Goldman Sachs US Economics GDP forecastsas of March 21, 2012

Exhibit 4:US macro data posting negative surprisesas of March 21, 2012

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) negativeEPS 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 sectorsas of March 20, 2012

Exhibit 6:Net equity outflow since 2006 totals $24 billionas of March 14, 2012

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

0.4

1.31.8

3.0

2.0 2.0 2.0

2.5

2.0 2.0

2.5 2.5

0.0 %

0.5 %

1.0 %

1.5 %

2.0 %

2.5 %

3.0 %

3.5 %

4.0 %

Q1A Q2A Q3A Q4A Q1E Q2E Q3E Q4E Q1E Q2E Q3E Q4E

GDPGrowth(qoqann

ualized%)

2011 2012 2013

Goldman SachsEconomics

Consensus

(125)

(100)

(75)

(50)

(25)

0

25

50

75

100

31-Jan-11

31-Mar-11

31-May-11

31-Jul-11

30-Sep-11

30-Nov-11

31-Jan-12

31-Mar-12

31-May-12

Rolling 1-MonthUSMAP Score

PositiveData

Surprises

NegativeData

Surprises

3 Month 2012 Revisions

EPS Sales

Information Technology 3.9 % 1.6 %

Industrials (0.6) (0.2)

Health Care (1.4) 0.4Utilities (1.4) NM

S&P 500 (1.5) 1.6

Consumer Discretionary (1.6) (0.4)

Consumer Staples (2.4) 0.2

Financials (3.5) NM

Energy (4.3) 8.0

Materials (7.0) (1.1)

Telecommunication Services (9.3) 1.0 (600)

(400)

(200)

0

200

400

600

800

2006 2007 2008 2009 2010 2011 2012TD

FundFlows,$Billions

Fund Flows

DomesticEquities

TaxableBonds

MoneyMarket

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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 four-

quarter 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 expansionas of March 21, 2012

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 returnas of March 21, 2012

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

10.0 x

10.5 x

11.0 x

11.5 x

12.0 x

12.5 x

13.0 x

13.5 x

14.0 x

1050

1100

1150

1200

1250

1300

1350

1400

1450

Jan-11

Feb-11

Mar-11

Apr-11

May-11

Jun-11

Jul-11

Aug-11

Sep-11

Oct-11

Nov-11

Dec-11

Jan-12

Feb-12

Mar-12

Apr-12

P/ERatio

S&P500Level

Forward P/E(RHS)

S&P 500 Level(LHS)

Contribution

Initial YTD to S&P 500Weight Return Return Share

Information Technology 19 % 20.6 % 393 bp 33 %

Financials 13 22.1 297 25

Consumer Discretionary 11 15.0 160 13

Industrials 11 11.6 124 10

Health Care 12 6.2 73 6

Energy 12 5.6 68 6

Consumer Staples 12 4.0 46 4

Materials 4 11.6 41 3

Telecommunication Services 3 4.6 15 1

Utilities 4 (3.0) (12) (1)

S&P 500 100 % 12.1 % 1205 bp 100 %

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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 theindex 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 contractsas of March 21, 2012


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

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

Change

9-Oct-07 21-Mar-12 Level PercentEarnings

EPS (LTM) $91 $97 $5 6 %EPS (NTM) 103 106 3 3

Expected Growth 12.5 % 9.4 % (3.1)pp (25)%

Valuation (NTM P/E) 15.2 X 13.2 X (2.0)X (13)%

S&P 500 Index 1565 1403 (162) (10)%

9-Oct-07 21-Mar-12 Level Percent

Nominal GDP ($Tr USD) $14.1 $15.3 $1.2 8 %

Real GDP Growth: Trailing 2.5 % 1.6 % (85)bp (34)%

Expected 2.4 2.3 (6) (3)

Headline CPI: Trailing 2.8 % 2.9 % 6 bp 2 %

Expected 2.4 2.3 (10) (4)

Fed Funds Rate 4.75 % 0.25 % (450)bp (95)%

10-Year Yield: Spot Rate 4.6 % 2.3 % (235)bp (51)%

Forecast 4.8 2.7 (213) (44)

Euro / US Dollar 1.41 1.32 (0.09) (6)%

US Dollar / Yen 117 84 (33) (29)%

Brent: Spot $77 $124 $48 62 %

12-mo fwd 76 118 42 55

Change

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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 is18% 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.

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.

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/Emultiple 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 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.

Exhibit 11:Drivers of S&P 500 index change between all-time peak on October 9, 2007 and March 21, 2012as of March 21, 2012

LTM EPS uses analyst forecast methodology which differs from Standard & Poors due to varying definitions of operating earnings and other accounting differences.


9-Oct-07 21-Mar-12 Change in S&P 500 index pointsLTM Expected P/E LTM Expected P/E EPS Expected Forward

Sector EPS Growth NTM EPS Growth NTM Level Growth P/E Total

Information Technology $9.85 24 % 20.8 X $19.42 10 % 13.5 X 129 (6) (89) 34

Consumer Discretionary 6.55 19 18.2 8.79 10 15.9 36 (7) (18) 10

Consumer Staples 7.56 10 17.6 9.14 7 15.4 24 (3) (19) 3

Materials 2.96 10 15.2 3.49 4 13.5 7 (2) (6) (1)

Utilities 3.10 10 16.0 3.55 (6) 14.1 6 (8) (6) (8)

Telecom Services 3.30 12 15.5 2.18 (4) 19.1 (21) (9) 13 (17)Energy 13.58 10 12.1 14.34 2 11.0 8 (12) (16) (20)

Health Care 9.96 15 16.1 12.54 2 12.2 32 (14) (44) (27)

Industrials 9.74 11 16.6 9.89 10 13.7 2 (1) (32) (31)

Financials 24.81 8 11.8 13.56 32 11.8 (132) 26 0 (106)

S&P 500 $91.42 13 % 15.2 X $96.89 9 % 13.2 X 90 (36) (217) (162)

Financials

Industrials

Health Care

InformationTechnology

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Exhibit 12:Change in EPS level, Oct 2007 vs. Mar 2012as of March 21, 2012

Exhibit 13:Change in forward Earnings Growth rateas of March 21, 2012

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

Exhibit 15:Change in index priceas of March 21, 2012

Source: Goldman Sachs Global ECS Research. Source: Goldman Sachs Global ECS Research.

(45)%

(34)%

1%

6%

14%

18%

21%

26%

34%

97%

6%

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

Financials

Telecom Services

Industrials

Energy

S&P 500

Utilities

Materials

Consumer Staples

Health Care

Cons Discretionary

Info Tech

Change in S&P 500 LTM EPS

(160)%

(129)%

(85)%

(84)%

(58)%

(58)%

(50)%

(37)%

(8)%

280%

(25)%

(250) (200) (150) (100) (50) 0 50 100 150 200 250 300 350

Utilities

Telecom Services

Health Care

Energy

Information Tech

Materials

Cons Discretionary

Consumer Staples

S&P 500

Industrials

Financials

Change in NTM EPS Growth

(35)%

(24)%

(18)%

(13)%

(13)%

(12)%

(11)%

(9)%

0%

23%

(13)%

(50) (40) (30) (20) (10) 0 10 20 30

Information Tech

Health Care

Industrials

S&P 500

Cons Discretionary

Consumer Staples

Utilities

Materials

Energy

Financials

Telecom Services

Change in P/E (NTM)

(33)%

(30)%

(17)%

(15)%

(14)%

(11)%

(1)%

2%

7%

13%

(10)%

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

Financials

Telecom Services

Industrials

Health Care

Utilities

Energy

S&P 500

Materials

Consumer Staples

Cons Discretionary

Information Tech

Change in S&P 500 Price

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Exhibit 16:2007 Decomposition of level and change in earnings, EPS growth, P/E multiple, index price, and attributionas of March 21, 2012

LTM EPS uses analyst forecast methodology which differs from Standard & Poors due to varying definitions of operating earnings and other accounting differences.


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 bottom-

up 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%.

A B C D E

Contribution to Expected NTM Contribution to Index Level

LEVEL S&P 500 LTM EPS EPS Growth P/E (NTM) S&P 500 Price AttributionSector 9-Oct-07 21-Mar-12 9-Oct-07 21-Mar-12 9-Oct-07 21-Mar-12 9-Oct-07 21-Mar-12 9-Oct-07 21-Mar-12

Information Technology $9.85 $19.42 24 % 10 % 20.8 X 13.5 X 253 287 16.2 % 20.5 %Consumer Discretionary 6.55 8.79 19 10 18.2 15.9 143 153 9.1 10.9Consumer Staples 7.56 9.14 10 7 17.6 15.4 147 150 9.4 10.7Materials 2.96 3.49 10 4 15.2 13.5 50 49 3.2 3.5Utilities 3.10 3.55 10 (6) 16.0 14.1 55 47 3.5 3.3Telecom Services 3.30 2.18 12 (4) 15.5 19.1 57 40 3.7 2.9Energy 13.58 14.34 10 2 12.1 11.0 181 161 11.6 11.5Health Care 9.96 12.54 15 2 16.1 12.2 184 157 11.7 11.2Industrials 9.74 9.89 11 10 16.6 13.7 180 149 11.5 10.6Financials 24.81 13.56 8 32 11.8 11.8 316 211 20.2 15.0

S&P 500 $91.42 $96.89 13 % 9 % 15.2 X 13.2 X 1565 1403 100.0 % 100.0 %

CHANGE

Sector Points % Growth % Multiple % Points % Weight %

Information Technology $9.57 97 % (14)pp (58)% (7.3)X (35)% 34 13 % 431 bp 27 %Consumer Discretionary 2.24 34 (10) (50) (2.4) (13) 10 7 179 20Consumer Staples 1.58 21 (4) (37) (2.3) (13) 3 2 127 14Materials 0.52 18 (6) (58) (1.7) (11) (1) (1) 31 10Utilities 0.45 14 (16) (160) (1.9) (12) (8) (14) (15) (4)Telecom Services (1.12) (34) (16) (129) 3.6 23 (17) (30) (81) (22)Energy 0.76 6 (8) (84) (1.1) (9) (20) (11) (11) (1)Health Care 2.58 26 (12) (85) (3.8) (24) (27) (15) (55) (5)Industrials 0.14 1 (1) (8) (2.9) (18) (31) (17) (86) (7)Financials (11.25) (45) 23 280 0.0 0 (106) (33) (521) (26)

S&P 500 $5.48 6 % (3)pp (25)% (2.0) (13)% (162) (10)% 0 bp 0 %

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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 sectoras of March 21, 2012


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 sectoras of March 21, 2012




Apple Inc. (AAPL) $0.35 26 % 37.6 X $3.62 22 % 14.1 X 46 10 (10) 46Info Tech ex. AAPL 9.50 24 20.1 15.80 7 13.3 84 (15) (80) (11)

Information Technology $9.85 24 % 20.8 X $19.42 10 % 13.5 X 129 (6) (89) 34AAPL as % of Info Tech 4 % 19 % 134 %



General Electric Co. (GE) $2.44 14 % 17.5 X $1.60 13 % 12.9 X (11) (2) (13) (25)Industrials ex. GE 7.31 10 16.2 8.28 10 13.8 13 1 (20) (5)

Industrials $9.74 11 % 16.6 X $9.89 10 % 13.7 X 2 (1) (32) (31)GE as % of Industrials 25 % 16 % 83 %

8/2/2019 2012vs2007 23.3.12

10/21



Exhibit 19:Top 20 and bottom 20 stocks ranked by contribution to S&P 500 index level change, 9 Oct 07 vs. 21 Mar 12as of March 21, 2012

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.


Contribution to Expected NTM Contribution to S&P 500 PriceS&P 500 NTM EPS EPS Growth P/E (NTM) Index Contribution Change

Name Ticker Sector 9-Oct-07 21-Mar-12 9-Oct-07 21-Mar-12 9-Oct-07 21-Mar-12 9-Oct-07 21-Mar-12 Points %Apple Inc. AAPL Information Technology 0.44 4.40 26 % 22 % 37.6 X 14.1 X 17 62 46 275 %

International Bus. Machines IBM Information Technology 1.17 1.91 19 10 15.5 13.7 18 26 8 44

Altria Group MO/PM Consumer Staples 1.15 1.51 (5) 9 15.3 15.4 18 23 6 32

Coca-Cola Co. KO Consumer Staples 0.64 1.02 12 6 20.3 17.5 13 18 5 36Amazon.com AMZN Consumer Discretionary 0.05 0.05 87 (3) 69.9 143.6 3 8 4 134QUALCOMM Inc. QCOM Information Technology 0.41 0.71 12 13 20.0 17.4 8 12 4 54Ford Motor Co. F Consumer Discretionary (0.12) 0.65 71 (19) NM 8.1 2 5 3 167

McDonald's Corp. MCD Consumer Discretionary 0.40 0.64 13 8 19.3 16.9 8 11 3 41

Occidental Petroleum OXY Energy 0.50 0.76 17 1 12.7 11.5 6 9 2 39

Union Pacific Corp. UNP Industrials 0.23 0.43 21 20 15.4 14.0 4 6 2 67Starbucks Corp. SBUX Consumer Discretionary 0.09 0.16 27 24 25.4 27.6 2 4 2 98

Simon Property Group SPG Financials 0.16 0.25 206 112 17.0 19.6 3 5 2 80Home Depot HD Consumer Discretionary 0.51 0.49 8 16 12.6 17.5 6 8 2 31Google Inc. GOOG Information Technology 0.48 1.19 40 17 33.7 15.1 16 18 2 11

Caterpillar CAT Industrials 0.46 0.69 27 26 13.1 11.4 6 8 2 31

Nike Inc. NKE Consumer Discretionary 0.15 0.22 19 16 17.8 20.4 3 4 2 66TJX Cos. TJX Consumer Discretionary 0.10 0.19 11 16 15.2 16.9 1 3 2 117

Anadarko Petroleum APC Energy 0.23 0.21 (21) 14 12.8 21.1 3 4 2 54

EMC Corp. EMC Information Technology 0.19 0.39 29 14 27.8 16.9 5 7 1 28Kraft Foods KFT Consumer Staples 0.34 0.49 (1) 10 18.0 15.2 6 7 1 23

Top 20 7.57 16.37 148 250 102 69 %

S&P 500 102.86 105.99 13 % 9 % 15.2 X 13.2 X 1565 1403 (162) (10)

Contribution to Expected NTM Contribution to S&P 500 PriceS&P 500 NTM EPS EPS Growth P/E (NTM) Index Contribution Change

Name Ticker Sector 9-Oct-07 21-Mar-12 9-Oct-07 21-Mar-12 9-Oct-07 21-Mar-12 9-Oct-07 21-Mar-12 Points %

Exelon Corp. EXC Utilities 0.47 0.28 23 % (29)% 16.6 X 13.0 X 8 4 (4) (54)%

Dell Inc. DELL Information Technology 0.38 0.35 18 (2) 18.8 8.4 7 3 (4) (60)JPMorgan Chase JPM Financials 2.25 2.03 (2) 7 10.4 9.4 24 19 (4) (19)Procter & Gamble PG Consumer Staples 1.27 1.28 18 6 19.8 16.1 25 20 (5) (19)

Schlumberger Ltd. SLB Energy 0.75 0.70 32 29 21.1 15.6 16 11 (5) (31)

Morgan Stanley MS Financials 0.90 0.31 (4) 66 9.2 10.8 8 3 (5) (59)ConocoPhillips COP Energy 1.79 1.22 2 (2) 8.8 9.0 16 11 (5) (31)

Sprint Nextel Corp. S Telecom Services 0.30 (0.50) (11) (127) 19.8 NM 6 1 (5) (84)

Wells Fargo & Co. WFC Financials 2.22 1.89 9 15 11.4 10.5 25 20 (5) (21)Verizon Communications VZ Telecom Services 0.99 0.78 10 16 18.0 15.9 18 12 (5) (30)Merck & Co Inc MRK Health Care 1.12 1.28 25 1 17.5 9.9 20 13 (7) (35)

AT&T Inc. T Telecom Services 2.11 1.54 18 7 13.8 13.6 29 21 (8) (28)

Pfizer Inc. PFE Health Care 2.37 1.88 8 (3) 11.6 9.6 28 18 (9) (34)Cisco Systems CSCO Information Technology 1.08 1.14 17 11 21.1 10.7 23 12 (11) (47)

Hewlett-Packard HPQ Information Technology 1.02 0.97 16 (0) 16.3 5.3 17 5 (12) (69)

Citigroup Inc. C Financials 2.63 1.32 8 10 10.2 9.3 27 12 (15) (54)Exxon Mobil Corp. XOM Energy 4.70 4.29 4 (2) 13.0 10.4 61 45 (16) (27)American Intl Group AIG Financials 2.01 0.16 7 122 10.2 10.6 20 2 (19) (92)

Bank of America BAC Financials 3.40 0.88 (4) NM 10.3 13.2 35 12 (23) (67)General Electric GE Industrials 2.78 1.82 14 13 17.5 12.9 49 23 (25) (52)

Bottom 20 34.54 23.62 460 268 (192) (42)%

S&P 500 102.86 105.99 13 % 9 % 15.2 X 13.2 X 1565 1403 (162) (10)

8/2/2019 2012vs2007 23.3.12

11/21



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 growthand 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 expansionas of March 20, 2012

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

3%

4%

5%

6%

7%

8%

9%

10%

11%

Dec-79

Dec-84

Dec-89

Dec-94

Dec-99

Dec-04

Dec-09

Dec-14

Goldman SachsPortfolioStrategy

S&P 500 Net Profit Margin

Bottom-up ConsensusForecast

8.8

5.9

3.9

4.7

5%

6%

7%

8%

9%

10%

11%

Dec-06

Dec-07

Dec-08

Dec-09

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14

4QE 20118.8%

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

3Q 20118.9%

2Q 20118.9%

1Q 20118.7%

Goldman SachsForecast

2012E9.1%

2013E9.7%

Bottom-up ConsensusForecast

8.7%8.9%

8/2/2019 2012vs2007 23.3.12

12/21



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

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

0%

2%

4%6%

8%

10%

12%

14%

16%

18%

20%

22%

Dec-79

Dec-82

Dec-85

Dec-88

Dec-91

Dec-94

Dec-97

Dec-00

Dec-03

Dec-06

Dec-09

Dec-12

Dec-15

Dec-18

Goldman SachsPortfolio Strategy

ForecastS&P 500

InformationTechnology

Net Profit Margin Bottom-Up ConsensusForecast

2013E

9.7%

8.9%

18.6%

17.0%

8/2/2019 2012vs2007 23.3.12

13/21



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


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


4Q 2011

EPS Sales Margin

Growth Growth Level Change

Financials 21 % NM NM NM

Info Tech 18 15 % 17.7 % 39 bp

Utilities 10 NM NM NM

Energy 9 21 7.0 (74)

Consumer Discretionary 6 7 6.7 (6)

Industrials 4 7 8.0 (23)

Consumer Staples 4 6 6.3 (16)

Health Care 2 7 8.4 (37)

Telecom Services (27) 5 4.2 (184)

Materials (42) 8 4.0 (350)S&P 500 8 %

ex. Financials and Utilities 6 10 % 8.4 % (35)bp

Apple (AAPL) 119 % 74 % 28.1 % 574 bp

Excluding Apple

S&P 500 5 %ex. Financials and Utilities 2 9 % 7.9 % (61)bp

Info Tech excluding AAPL 1 8 15.6 (107)

1Q 2012E

EPS Sales Margin

Growth Growth Level Change

Financials 17 % NM NM NM

Industrials 13 9 % 7.8 % 29 bp

Info Tech 11 10 16.4 16

Health Care 8 3 9.8 46

Energy 3 14 7.6 (79)

Utilities 1 NM NM NM

Consumer Staples (2) 5 5.8 (44)

Consumer Discretionary (4) 4 6.1 (54)

Materials (12) 6 8.3 (168)

Telecom Services (16) 5 5.6 (140)

S&P 500 6 %


Apple (AAPL) 51 % 46 % 25.0 % 74 bp

Excluding Apple

S&P 500 5 %


Info Tech excluding AAPL 4 6 15.0 (30)

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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 500index 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 sectorsas of December 31, 2011

Source: Compustat and Goldman Sachs Global ECS Research.

0%

5%

10%

15%

20%

25%

30%

0% 5% 10% 15% 20% 25% 30% 35%

4Q2

011SectorROE

% of S&P Book Value

Financials

Info Tech

Energy

Utilities

Telecom Services

Materials

Staples

HealthCare

Industrials

Discretionary

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

S&P 500 ROE = 16.9%

8/2/2019 2012vs2007 23.3.12

15/21



Exhibit 25:Trailing four-quarter return on equity, 1975-2013Eas of December 31, 2011

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 Financialsas of March 21, 2012

Exhibit 27:GS 2013 ROE estimates for S&P 500 Financialsas of March 21, 2012

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

(10%)

(5%)

0%

5%

10%

15%

20%

25%

Dec-75

Dec-79

Dec-83

Dec-87

Dec-91

Dec-95

Dec-99

Dec-03

Dec-07

Dec-11

Dec-15

ReturnonEquity(LTM)

S&P 500 (ex-Financials)

FinancialsReturn on Equity(LTM)

GSForecast

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

8/2/2019 2012vs2007 23.3.12

16/21



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) dividenddiscount model (DDM) that is based on cash flows discounted at the cost of equity; (2) top-

down 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 valuationas of March 15, 2012

Source: Goldman Sachs Global ECS Research

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.

Implied S&P 500 Fair Value

P/E Price

Methodology Multiple Level Upside

Fed Model 15.3 1630 16

Macroeconomic Regression 13.0 1370 (2)

Uncertainty-based Model 12.1 1280 (9)

US Portfolio Strategy DDM 12.8 1275 (9)

Cyclically Adjusted P/E 16.7X 1260 (10)%

Price/Book

ROE and Price/Book 2.3X 1410 0 %

Average 1370 (2)%

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17/21



Exhibit 29:S&P 500 forward P/E is slightly higher than its long-run average since 1976S&P 500 price / next twelve months EPS estimate

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 marginsS&P 500 price / next twelve months EPS estimate vs. operating profit margin

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

0

5

10

15

20

25

30

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

S&P500forward

price/earnings

ratio

S&P 500 P/E ratio

12.8X average since 1976

3

4

5

6

7

8

9

10

0

5

10

15

20

25

30

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

S&P500operatingmargin(%)

S&P500forwardP/E P/E multiple (LHS)

Operatingmargin (RHS)

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18/21



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

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 yieldsare 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-postequity 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.

0

5

10

15

20

25

30

35

40

45

50

1929

1934

1939

1944

1949

1954

1960

1965

1970

1975

1980

1985

1990

1995

2000

2005

2010

2015

2020

2025

Cyclically-AdjustedP/E

Current(14-Mar)

Cyclically AdjustedS&P 500 P/E Ratio

(10-year average trailing EPS)

16-Aug-826.2x

Operating18.5x

1932

5.1x

As Reported80 year

avg = 17.6x

9-Mar-099.9x

Operating 80year

avg = 16.7x

As Reported22.5x

8/2/2019 2012vs2007 23.3.12

19/21



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 thisreport accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of ourcompensation 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 SellGlobal 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 assignsstocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Holdand 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: manageror co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs usually makes amarket 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 anofficer, director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S. analysts maynot be associated persons of Goldman, Sachs & Co. and therefore may not be subject to NASD Rule 2711/NYSE Rules 472 restrictions oncommunications 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 lawsand regulations. Australia: Goldman Sachs Australia Pty Ltd and its affiliates are not authorised deposit-taking institutions (as that term is defined inthe Banking Act 1959 (Cth)) in Australia and do not provide banking services, nor carry on a banking business, in Australia. This research, and anyaccess to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act, unless otherwise agreed by GoldmanSachs. Brazil: Disclosure information in relation to CVM Instruction 483 is available at http://www.gs.com/worldwide/brazil/area/gir/index.html. Whereapplicable, the Brazil-registered analyst primarily responsible for the content of this research report, as defined in Article 16 of CVM Instruction 483, isthe first author named at the beginning of this report, unless indicated otherwise at the end of the text. Canada: Goldman, Sachs & Co. has approvedof, and agreed to take responsibility for, this research in Canada if and to the extent it relates to equity securities of Canadian issuers. Analysts mayconduct 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) SecuritiesPrivate Limited; Japan: See below. Korea: Further information on the subject company or companies referred to in this research may be obtainedfrom 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 distributedin the Russian Federation are not advertising as defined in the Russian legislation, but are information and analysis not having product promotion astheir main purpose and do not provide appraisal within the meaning of the Russian legislation on appraisal activity. Singapore: Further informationon 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 investmentrisk. Investment results are the responsibility of the individual investor. United Kingdom: Persons who would be categorized as retail clients in theUnited Kingdom, as such term is defined in the rules of the Financial Services Authority, should read this research in conjunction with prior GoldmanSachs research on the covered companies referred to herein and should refer to the risk warnings that have been sent to them by Goldman SachsInternational. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are available from Goldman SachsInternational 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 availableat http://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection withInvestment Research.

Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer under the Financial Instrument and Exchange Law, registered with the KantoFinancial Bureau (Registration No. 69), and is a member of Japan Securities Dealers Association (JSDA) and Financial Futures Association of Japan(FFAJ). Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specificdisclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the JapaneseSecurities Finance Company.

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 Buyor 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 asa Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to aglobal 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 coveragegroup may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investmentrecommendations 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 associatedwith the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in eachreport 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 athttp://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment outlookon the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over thefollowing 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 anadvisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). GoldmanSachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis fordetermining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating andprice target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspendedcoverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The informationis not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded.

Global product; distributing entities

The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a globalbasis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research onmacroeconomics, 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., SeoulBranch; 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 thisresearch in connection with its distribution in the United Kingdom and European Union.

European Union: Goldman Sachs International, authorized and regulated by the Financial Services Authority, has approved this research inconnection with its distribution in the European Union and United Kingdom; Goldman Sachs AG, regulated by the Bundesanstalt frFinanzdienstleistungsaufsicht, may also distribute research in Germany.

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 weconsider 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 asappropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the largemajority 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 haveinvestment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment ResearchDivision. 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 ourproprietary trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, ourproprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or viewsexpressed 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 maydiscuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equitysecurities discussed in this report, which impact may be directionally counter to the analysts' published price target expectations for such stocks. Anysuch trading strategies are distinct from and do not affect the analysts' fundamental equity rating for such stocks, which rating reflects a stock'sreturn 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 beillegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs ofindividual 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 themmay 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 athttp://www.theocc.com/about/publications/character-risks.jsp. Transaction costs may be significant in option strategies calling for multiple purchaseand 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 inwhole by the issuers concerned if Goldman Sachs Australia considers it is appropriate and reasonable in the specific circumstances relating to thesite visit or meeting.

All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not allresearch content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of ourresearch by third party aggregators. For all research available on a particular stock, please contact your sales representative or go tohttp://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, NY10282.

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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