EFTA Document EFTA01367791

Deutsche Bank Markets Research North America United States US Equity Insights S&P hits record high on 18 trailing PE, PE will be sensitive to Treasury yields PE at j)O8(.cr isis high on delayed Fed hike expectations boosts S&P to record S&P grinds higher despite continued soft macro data on dovish central bank communications. S&P trades at 18x trailing 4-qtr EPS (2O14-1O15). the highest since 2010. Fed lowered its 2015-16 FF rate outlook in March and the April minutes dismiss the June hike. Market liftoff expectations are slipping to after Sept. ECB reiterates its asset purchase goals. Liftoff accompanied by Fed forecasts of a 2% plateau rate this cycle would pave the road for a S&P trailing PE of 18.5 at 2015 end and perhaps higher in later years if 10yr Treasury yields do not materially exceed 3%. But waiting too long to hike raises the risk of unit labor cost acceleration and a disorderly climb to higher 10yr yields. Median steak PE remains high, s tieing above historic norms is broad based Many metrics suggest S&P valuation is full and dependent on low bond yields. S&P's 18 trailing PE and 17.3 forward PE are 12% and 22% above the averages since 1960. The median trailing PE of all S&P stocks is 18.7, 2 full points higher than its historic average. The index is entering 1997-2000 valuations ex. Tech. It's time to buy the Big & Loy.; 25 stock basket again as Energy names tall ow The 25 stocks that most lower the S&P PE are attractive again. These stocks have big market cap and earnings weights and trade at low PEs vs. the S&P. These 25 stocks are: 9 Financials (JPM, C, WFC, BAC, GS, MET, PRU, AIG, C0F), 8 Tech (AAPL, IBM, HPO, CSCO, MU, OCOM, INTC, ORCL), 2 Airlines (AAL, DAL), 2 Telecom (VZ, T), 2 Autos (GM, F), 1 Health Care (GILD), and 1 Energy (VLO). The aggregate PE on 2015 EPS of these 25 stocks is 12 vs. 20x for the S&P excluding them. We see value at Telecom. but return it to EW from the OW set Jan end and put Media/Cable back to EW from UW. We OW HealthCare, Tech, Financials & Utilities. We UW Energy, Indus. & Materials. Market ‘:ornplacenev r eiernet pus in both cash equities and derivatives Our PENIX market emotion indicator climbed to 1.3 on S&P trailing PE of 18 and 3m avg VIX of 14. A level between 1.2-1.5 signals complacency. There was similar complacency going into summer last year, with S&P trailing PE at 17.5 and a calm market kept VIX at 10-14. The complacency persisted to July but then faded as the risk of higher yields came on falling unemployment, but yields ultimately stayed subdued preventing any major summer sell-off. Yet a selloff began in late Sept as oil prices started cracking and the dollar climbing. Risk of a near ter;r: dip is high We believe the probability of a 5%+ dip is high this summer and our tactical call remains Down given the S&P now at an even higher PE than a year ago, heightened uncertainty in 10yr yields, weak earnings growth and continued soft economic data. We haven't had a 5%+ dip this year. Historically 5%+ dips are common and happen at least once a year since 1960, except 1964, 1993 & 1995. It has been 916 trading days (3.6 years) since a 10% correction. Selloff triggers could be a further rise in Irlyr yields especially if UE keeps falling amidst slow economic growth and Fed remains unclear on first hike timing, or a jump in the dollar upon the Fed expressing firm intentions to hike in Sept. There is also the possibility of central banks competing to out-dove each other this summer, such that yields climb upon delayed Fed hikes (PE bad) & yet the dollar climbs too (EPS bad) as other central banks stay determined to keep their currencies weak vs. dollar. We know central banks want to be supportive of markets and confidence, but this has its risks now especially in the US. 22 May 2015 David Bien. Strategist Wrnoiti Nip Strategist SIM Shah:gist ;TS), !sev. t C,Te• MAC Price Next 5%+ move 2130.82 Down 2014 2015E 2016E Yearond Target 2058.90 2150 2300 EPS $118 $118 $128 Target WE 17.4x 18.2x 18.0x Current P/E 18.1x 18.1x 16.6x DPS $38.75 $42 $46 P,katcgl .nc5:11 re-v.earch Dile What if Fed relents on hikes for 15 May 2015 2015? A little EPS upside. but more PE tisk Ascent of S&P margins 10 May 2015 continues: 10%. net margin survives Energy dip 2015's S&P 500 tug-of-war 22 Mar 2015 intensifies: Dimmer EPS vs. brighter PE outlook The PE tug-of-war continues in 11 Jan 20t5 2015: Slow EPS growth vs. low bond yields US Equity Si:stagy baskets High Foreign Cash (Repatriation Beneficiaries) Big-Cap Reasonable PE Tech Challenged Industrial Capital Goods US Domestic Strength Bloomberg Ticker DBUSHIFC DBUSBRTE DBUSCICG DBUSDMST Deutsche Bank Securities Inc. Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0059404 SDNY_GM_00205588 EFTA01367791