Same underlying EPS growth trend, but higher PEs

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1 The Allocator October 9, 2017 Same underlying EPS growth trend, but higher PEs David Bianco Chief Investment Strategist, Americas Deutsche Asset Management Why the market has decided to raise valuations right now is unclear to us We ve been caught heavy footed this autumn as the market has rallied strongly led by small and value stocks. The timing of this rally surprised us. Many attribute the rally to good economic data like the 3.1% lagging 2Q gross domestic product (GDP) report, and the more coincident strong Sept. Purchasing Managers Index (PMIs), and the leading indicator of rising Treasury yields, with a potential corporate tax cut as a big cherry on top. Yet we think the underlying macro environment and key profit drivers remain mostly in-line with the trend since 2012 and that the acceleration in S&P earnings-per-share (EPS) growth since late 2016, post the profit recession, is actually in a process of slowing to a 5-7% pace. Although such growth and persistently low yields support observed price-to-earnings ratio (PEs), we think now is the wrong time for PE expansion, especially at small caps, given continued or increased uncertainty on tax cuts, 2018 interest rates and still poor Energy profits. We re constructive on equities longer-term, but think the market likely ends the year lower from here. 3Q S&P EPS reporting begins this week: Results will be good, outlook should be good Bottom-up 3Q S&P 500 EPS is $32.50, up 4.8% year over year (y/y) and our long standing estimate is $33. It should be a good earnings season with the typical 2-3% EPS beats, which will put final 3Q EPS at slightly above $33 and y/y growth at 7%. The growth rate remains healthy despite slower than the 16% in 1Q and 12% in 2Q. The Energy sector will post very little profits once again at average WTI oil price of $48 in 3Q, but should be better than last year. 3Q S&P EPS y/y growth is likely 5% ex Energy. We think this continues as trend in 2018 without tax cuts. Strongest 3Q EPS growth will be at Tech and Industrials. Since June end, but mostly since the hurricanes, consensus 3Q EPS has been cut by 4.3%. The cut was across all sectors except Tech. Biggest cuts at Energy & Financials. Will the Russell 2000 post an EPS growth rate breakout upside surprise? Not likely Bottom-up (btm-up) 3Q Russell 2000 (R2000) EPS is $12.23, up 3.7% y/y. The shooting star pattern in the past few quarters show that last minute cuts usually offset EPS beats and the bottom-up EPS stays quite flat during reporting. We expect the final 3Q R2000 EPS to be 3- y/y, in line with current consensus. Since June end, consensus 3Q R2000 EPS has been cut by a whopping 11.5%, which is typical. S&P EPS is not US GDP: Competition is fierce and excess capacity still in basic goods Charts and regressions depicting S&P EPS growth versus nominal U.S. GDP growth exaggerate the strength of the relationship. While there is no doubt that S&P EPS tends to fall sharply during recessions and then rebound in recoveries, the sensitivity between U.S. GDP and S&P EPS is much less during midcycle years. There have been many years of strong EPS growth amidst moderate GDP growth and even years of falling EPS amidst moderate GDP growth. S&P non-financial profits are global and more exposed to business spending and commodities production than U.S. GDP. Also fierce competition can lead to slim profits and inventory accumulation and yet boost real GDP. This is worth keeping in mind given the situation in retailing and many consumer goods. S&P Financial profits are domestic with sensitivities to loan growth, interest rates and also capital markets activity. Economic profit growth justifies PEs above steady-state, not EPS growth or GDP growth EPS growth stems from the proportion of earnings retained and the return on reinvested earnings. GDP growth provides an opportunity for companies to reinvest profits and possibly earn incremental economic profits. But weak/strong GDP doesn t usually cause weak/strong economic profit growth. Usually S&P 500 economic profit growth is best achieved amidst slow and steady GDP growth, where companies have the opportunity and confidence to invest, but also don t lose their discipline and overly invest on strong GDP exuberance. And then there are many companies, in certain industries and regions outside of the US that don t improve economic profits in either slow, moderate or strong GDP conditions. Generally, EPS growth is only economic profit growth if it exceeds cost of equity less the dividend yield. The PE for companies at economic steady-state should be 1/real CoE. We think foreign equities have more upside than US on higher fair steady-state PEs vs. observed PEs given low interest rates and many Asia EM growth stocks are showing encouraging return on equity (ROEs). S&P 500 Outlook S&P Dividend Yield 2.1% 2.1% S&P total return 11.5% 8.2% Next 5%+ price move (Up / Balanced Risk / Down) Risk of near-term correction (Low / Moderate / High) Down Moderate S&P EPS $119 $131 $140 PE on trailing EPS DPS $49 $53 Allocations for taxable / USD capital as of October 9, 2017 Deutsche AM View Current Long-term Fixed Income 35% 35% Equities 6 55% U.S. Equities 35% 4 S&P % 35% Small Caps (R2) 0-1 Foreign DM Equities 2 15% Foreign EM 5% 0-1 Alternatives 5% 1 Risk & Duration: Preference shaded Low Risk β Stocks Down Gold TIPS Cash Treasury Bonds Short Duration IG Bonds Muni Yields Up Yields Down Long Duration Bond Substitutes Cyclical Stocks Value Stocks Growth Stocks Defensive Stocks HY Bonds Oil /Copper Stocks Up Source: Deutsche AM. All opinions and claims are based upon data on 10/9/2017 and may not come to pass. This information is subject to change at any time, based upon economic, market and other considerations and should not be construed as a recommendation. For illustrative purposes only. High Risk β Contributor - Ju Wang, Investment Strategist & Portfolio Analyst For institutional client and registered representative use only. Not for public viewing or distribution.

2 Fishhooks: S&P 500 quarterly analyst consensus btm-up EPS revisions 36 4Q S&P 500 quarterly btm-up EPS revisions 4Q14 2Q15 4Q15 2Q16 3Q17 2Q17 4Q Q11 4Q11 3Q12 2Q12 1Q12 4Q12 2Q13 1Q13 4Q13 3Q13 3Q14 2Q14 1Q14 3Q15 1Q15 1Q16 3Q16 1Q Q Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep Revision to EPS during the calendar quarter vs. EPS beat during reporting 8% 8% 6% Avg (1Q11-2Q17): 3. 6% 2% 2% -2% -2% - -6% Avg: -3.9% - -6% -8% -8% % -12% 2011/1C 2011/2C 2011/3C 2011/4C 2012/1C 2012/2C 2012/3C 2012/4C 2013/1C 2013/2C 2013/3C 2013/4C 2014/1C 2014/2C 2014/3C 2014/4C 2015/1C 2015/2C 2015/3C 2015/4C 2016/1C 2016/2C 2016/3C 2016/4C 2017/1C 2017/2C EPS beat during reporting EPS cut prior to reporting (during the calendar quarter) Change in S&P 500 btm-up 3Q17 EPS since 6/30/2017 (on current S&P 500 constituents) 2% -2% - -6% -8% -1-12% % Change in btm-up 3Q17 EPS since 6/30/ % -1.7% -2.5% -3.6% % -12.2% -20.7% -11.9% % -3.1% -1.9% S&P ex. Fin & RE ex. En ex. Tech En, Fin & RE Ex. En, Fin & RE Ex. En, Fin, RE & HC Disc. Staples Energy Financials Health Care Industrials Tech Materials Real Estate Telecom Utilities For institutional client and registered representative use only. Not for public viewing or distribution. Same underlying EPS growth trend, but higher PEs 2

3 Change in S&P 500 btm-up 2017 EPS since 6/30/2017 (on current S&P 500 constituents) Change in btm-up 2017 EPS since 6/30/2017 2% 0.6% 1.1% 1.7% 0.7% 0.8% -2% % -0.1% % % % -0.1% -0.5% -0.1% -6% -14.3% S&P ex. Fin & RE ex. En ex. Tech En, Fin & RE Ex. En, Fin & RE Ex. En, Fin, RE & HC Disc. Staples Energy Financials Health Care Industrials Tech Materials Real Estate Telecom Utilities 3Q17 S&P 500 EPS (earnings weight) to be reported each week 4 35% 3Q S&P 500 EPS (earnings weight) to be reported each week % 22.7% % 15% 1 5% 4.9% 7.9% 4.9% 4.1% % Pre-season # 25 W1 (10/9-10/13) #10 W2 (10/16-10/20) #63 W3 (10/23-10/27) #180 W4 (10/30-11/3) #135 W5 (11/6-11/10) #42 W6 (11/13-11/17) #21 W7(11/20-11/24) #13 After 11/24 #11 3Q17 S&P 500 sector EPS (earnings weight) to be reported each week Q S&P sector EPS (earnings weight) to be reported each week Disc. Staples Energy Financials Health Care Industrials Tech Materials Telecom Utilities Reported Week 1 #10 Week2 #63 Week3 #180 For institutional client and registered representative use only. Not for public viewing or distribution. Same underlying EPS growth trend, but higher PEs 3

4 S&P 500 quarterly EPS & Sales growth and Net Margins by sector (3Q17 is blended with actual for reported and consensus for the rest) EPS growth (y/ y) 1Q14 2Q14 3Q14 4Q Q15 2Q15 3Q15 4Q Q16 2Q16 3Q16 4Q Q17 2Q17 3Q17 S&P % % 7.2% % 2.1% 0.8% -2.6% 1.1% -5.1% -1.5% 3.8% % 16.1% % S&P 500 ex. Financials & Real Est % % % -1.5% -0.9% -3.8% -1.3% -3.3% -1.1% 2.7% 6.7% 1.7% 15.2% 12.5% 7.5% S&P 500 ex. Energy 5.5% 7.7% 10.8% % 12.1% % 3.3% 8.3% 0.2% % 7.5% 5.2% % 2.9% S&P 500 ex. Tech 4.1% 7.5% 11.1% 4.2% 5.9% 1.9% 0.9% -1.3% -4.1% -0.7% -5.5% -2.8% % 14.3% 10.7% 2.8% S&P ex. Energy, Fin & Real Est 7.2% % 14.6% 10.3% 10.8% 7.9% 7.8% % 3.8% 4.8% 7.3% 6.8% 6.2% % 5.2% S&P ex. Energy, Fin, Real Est, Healthcare % 7.1% 12.6% 8.7% % 2.3% 6.2% 1.9% 4.1% 7.1% 6.9% 5.6% % 5.7% FANG (FB, AMZN, NFLX, Google) 22.7% % 19.8% 23.3% -3.2% 16.9% 34.7% 36.8% 21.6% % % 43.2% -6.5% 22.1% FANG & AAPL % 18.1% 41.7% % 35.6% 37.1% 13.1% 24.8% % % 8.1% 21.7% % S&P ex FANG 4.5% 8.6% 10.8% 7.1% 6.8% % % 0.8% -5.8% % 6.9% 0.8% % 4. S&P ex FANG & AAPL 4.1% 8.3% 10.5% 4.8% 6.2% % -0.9% % -5.1% -1.5% 3.9% 7.2% 1.2% 15.7% 12.8% 4.1% S&P ex. Energy & Fin & Real Est & FANG 6.9% 11.9% 9.1% 14.5% 10.1% 11.1% 7.7% 7.3% 2.7% 7.2% % % 5.3% % 4.6% Consumer Discretionary 5.8% 7.6% -2.1% 15.3% % % % 23.6% 14.2% 8.1% 5.2% 10.9% 7.7% 4.1% 0.5% M ultiline & Specialty Retail % 23.3% 16.1% 17.5% 11.6% % 10.1% 12.1% 9.1% 9.7% 10.8% % 7.8% 4. Consumer Staples 4.3% % 0.2% 3.8% 4.1% % -1.2% 0.1% 0.7% % 7.3% 4.6% 4.7% 3.1% 3.9% Energy -0.3% % % -57.1% % -59.9% % -68.1% 0.8% -78.1% NA 488.1% 129.9% Financials -3.3% -10.1% 16.8% -5.1% -2.7% 17.7% 18.8% 7.8% 1.7% 11.3% % 0.8% 22.2% 13.5% -6.2% Financials ex. BAC, C & JPM 3.6% 3.2% 10.8% % % -9.2% -2.3% -12.8% -0.8% % 1.1% 17.2% 12.3% -11.1% Health Care 12.7% 19.1% 18.2% % % 12.3% % 10.7% 7.3% 7.9% 6.6% 8.6% 6.6% 7.6% 3.1% Industrials % 12.7% 13.3% 9.9% 11.7% 0.6% % 2.3% % 0.8% 3.7% % Industrials ex. BA -0.6% 11.7% % 9.3% 11.7% 2.5% -0.5% % -1.2% % -2.8% 1.2% 3.1% 0.8% 7. Industrials ex. Defense -2.6% 13.9% 13.3% % % -0.1% -3.8% 2.3% -2.3% 0.9% 0.8% -1.9% -0.3% 2.9% % Information Technology 7.8% 16.5% 9.5% 18.5% 11.7% 12.3% 7.9% 10.8% % -3.6% 3.9% % 7.8% % 13.1% Tech ex. AAPL & GOOG 5.6% 14.7% % 8.8% 5.2% -0.5% 3.7% -1.7% % 16.9% 17.2% 11.5% 24.9% 24.3% 11.7% Materials -0.8% 8.9% 18.2% -0.1% 6.5% 0.9% % -14.8% -4.1% -9.3% -6.9% 8.9% % 6.9% 4.2% Real Estate 32.3% 23.1% % 12.7% 7.8% 11.9% 12.7% % 4.1% 2.5% 9.7% 5.1% % 2. Telecommunication Services 15.8% 5.3% % 10.7% 2.6% 10.1% 15.8% 21.8% 12.7% 8.2% -0.9% % 1.2% -4.9% 4.8% -1.2% Utilities 20.1% -0.5% 1.9% 8.5% % 4.6% 0.1% -9.1% -0.2% % 10.8% 10.2% 5.9% 2.6% 6.1% -2.2% Sales growth (y/ y) 1Q14 2Q14 3Q14 4Q Q15 2Q15 3Q15 4Q Q16 2Q16 3Q16 4Q Q17 2Q17 3Q17 S&P % 4.9% 4.2% 0.9% 3.3% % -4.1% -6.3% -4.5% -1.9% -0.8% % 1.6% 7.5% 5.3% 4. S&P 500 ex. Financials & Real Est % 3.8% 1.1% % -4.7% -7.2% -5.2% -1.8% -1.1% 2.1% % 5.6% 4.9% S&P 500 ex. Energy % 3.9% 4.5% 2.1% 0.9% 1.3% -2.2% 0.7% 1.3% 2.3% 4.5% % 5.6% 4.5% 2.5% S&P 500 ex. Tech 3.1% 4.7% 4.1% 0.1% 3.1% -4.3% -4.6% -4.8% -6.9% % % 4.6% 1.2% 7.5% 4.9% 3.3% S&P ex. Energy, Fin & Real Est 4.7% 5.8% 5.3% 4.7% 4.9% 1.9% 0.9% 1.5% -2.5% 0.8% % 4.6% 5.8% 3.6% 5.2% 4.6% 3.2% S&P ex. Energy, Fin, Real Est, Healthcare 4.2% 4.5% % 3.6% % % -0.8% 0.2% 0.9% % 2.8% 5.1% 4.7% 2.9% FANG (FB, AMZN, NFLX, Google) 19.5% 20.8% 18.7% 14.1% 17.9% 15.8% 17.7% % % 29.5% 28.1% 25.2% % 26.6% FANG & AAPL % 15.2% 23.3% 14.7% % % 18.2% 2.3% 4.8% 7.7% % 14.7% 17.3% 18.2% S&P ex FANG 3.3% 4.8% % 3.1% -3.6% -4.2% % -4.8% -2.3% -1.2% 1.9% 4.7% 1.1% 7.1% 4.9% 3.5% S&P ex FANG & AAPL 3.3% 4.7% 3.9% % -4.2% -4.8% -4.9% -7.1% -5.3% -2.1% % 4.8% 1.3% 7.1% 4.8% 3. S&P ex. Energy & Fin & Real Est & FANG % 5.1% 4.5% 4.7% 1.7% 0.6% 1.2% -3.1% % 1.9% % 3.1% 4.7% 4.1% 2.6% Consumer Discretionary 5.3% 5.5% 4.9% 4.1% 5.6% 1.3% 2.5% 4.8% % 10.2% 6.3% 8.7% 8.9% 6.1% 8.2% 3.7% -0. Multiline & Specialty Retail % 5.3% 5.9% % 3.9% % 4.3% 16.9% -1.8% 6.3% 2.7% 0.6% 4.1% 1.6% -0.9% Consumer Staples % 2.8% % 1.9% 0.9% % -0.3% % 1.5% 3.7% % 2.5% 3.9% Energy 0.6% % -16.9% -3.9% -35.3% -31.9% -36.1% -36.5% -36.3% -31.5% -26.6% -17.9% % 33.2% Financials -0.1% % -0.8% % 0.7% -0.2% -0.9% -0.1% -2.8% 0.6% 4.1% 3.3% 2.2% % -1.8% Financials ex. BAC, C & JPM 1.2% % 3.6% 4.3% % -1.9% 0.1% -1.7% 1.1% % % -2.6% Health Care 7.1% 11.5% 11.3% 8.9% 10.7% 8.7% 6.8% 8.2% 7.8% 7.6% % 6.9% 5.5% 6.9% 5.6% 4.5% 4.6% Industrials 1.1% 3.2% 3.7% 3.3% 1.5% % -5.7% -10.3% -6.1% -5.7% -4.3% 3.2% 2.3% -0.1% 3.5% 4.9% -0. Industrials ex. BA % 2.9% 4.8% % 8.9% -3.6% 6.1% 2.3% 0.9% -7.7% -1.3% -1.6% -7.5% -8.3% -0.5% Industrials ex. Defense 1.7% % 1.8% -2.5% -4.1% -6.5% -10.6% -6.3% -6.9% % 1.2% -0.8% 3.9% % Information Technology % 5.3% 7.1% % 1.5% 2.2% -2.2% % % 9.2% 4.3% 7.1% 8.6% 10.2% Tech ex. AAPL & GOOG 7.3% 7.6% 3.6% 0.9% 2.9% -1.1% -4.8% -2.8% -5.1% -0.8% -1.3% % 10.3% 5.9% % 9.6% M aterials 2.1% 3.3% 2.2% -2.9% 0.2% -10.1% -9.9% % % % 6.1% -1.9% 8.7% 8.8% 6.2% Real Estate % 8.7% 5.9% 7.9% 4.5% % 5.3% % 9.7% 8.5% 7.5% 10.7% % Telecommunication Services 3.9% 3.3% 3.2% 5.1% 3.9% 2.2% % % -0.8% -2.9% 3.6% -4.7% -1.3% -0.6% Utilities 15.9% 3.3% 5.1% 8.9% 8.2% -2.1% -4.7% % -7.3% -11.7% % % 7.2% 6.9% 3.6% Net margins 1Q14 2Q14 3Q14 4Q Q15 2Q15 3Q15 4Q Q16 2Q16 3Q16 4Q Q17 2Q17 3Q17 S&P % % 10.6% 10.7% 10.8% 10.6% 10.7% % 10.6% 10.5% 10.7% % S&P 500 ex. Financials & Real Est 9.2% 9.6% 9.7% 9.7% 9.6% 9.6% 9.8% 9.9% 9.9% 9.8% 9.2% 9.5% 9.8% 9.8% 9.6% 9.7% 10.1% 10.1% S&P 500 ex. Energy 10.3% 10.7% 10.8% 10.9% 10.7% 11.1% % 11.3% 11.3% 10.8% 11.2% % 11.2% 11.3% 11.7% 11.5% S&P 500 ex. Tech 9.1% 9.5% 9.6% % 9.5% 9.8% 9.8% 9.1% 9.6% % 9.1% 9.3% % 9.6% S&P ex. Energy, Fin & Real Est 9.5% 9.9% 10.1% 10.2% 9.9% 10.1% % 10.6% % % 10.5% % 10.8% S&P ex. Energy, Fin, Real Est, Healthcare 9.3% 9.8% % 9.8% 9.9% 10.2% % 10.3% 9.9% 10.3% 10.5% 10.7% % 10.7% 10.8% FANG (FB, AMZN, NFLX, Google) 11.7% 11.1% % 10.5% 10.1% 11.3% 10.9% 11.5% % % 12.8% 13.3% 10.1% 11.9% FANG & AAPL 17.9% 16.2% 15.3% 18.9% 17.1% 18.2% % 18.9% 17.5% 16.3% 15.6% 15.6% 17.8% % 13.9% 15.3% S&P ex FANG % % 10.6% 10.7% 10.8% 10.5% 10.7% % 10.6% % % S&P ex FANG & AAPL 9.8% 10.1% 10.3% 9.9% % 10.5% 10.5% 10.1% % 10.2% 10.5% 10.2% 10.2% % 10.6% S&P ex. Energy & Fin & Real Est & FANG % 10.1% 10.2% 9.9% 10.1% % 10.6% 10.3% % 10.5% 10.5% 10.3% 10.3% 10.8% 10.7% Consumer Discretionary 6.3% % 7.1% 6.9% 6.7% 7.5% 7.8% 7.9% % 7.6% 7.5% 7.5% % 7.6% Multiline & Specialty Retail % 5.1% 6.2% 5.5% % 5.3% 6.8% 5.6% 5.5% 6.5% 5.3% 7.1% % 6.7% 5.5% Consumer Staples 6.3% % 6.6% 6.7% % 6.8% 6.7% % 7.1% 6.9% 6.8% % 7. Energy 8.1% 8.2% 8.1% 6.6% 7.8% 5.3% 5.1% 5.5% 2.7% 4.8% -0.7% 0.7% 2.1% 2.6% 1.2% 4.1% 3.8% 3.9% Financials % 13.8% % 15.6% 15.5% 14.7% 13.6% % 14.5% 15.1% 14.5% 14.5% 15.1% % Financials ex. BAC, C & JPM % 14.3% 13.7% 14.1% 14.5% 13.5% 12.6% % % 12.6% % 13.7% 12.5% Health Care 10.3% 10.6% 10.5% 10.3% 10.3% 10.9% 11.1% 10.8% 10.2% 10.6% 10.9% 10.7% 10.7% 10.1% 10.6% 10.8% 10.9% 10.5% Industrials 7.6% % 9.3% % 9.5% 9.9% 9.5% 9.5% % 9.3% % 8.3% 9.6% 9.8% Industrials ex. BA 7.7% 9.6% 9.9% 9.5% 9.3% 8.7% % % 10.6% 9.3% 9.2% % 9.9% 10. Industrials ex. Defense % 9.8% % 8.5% 9.7% 10.1% 9.7% 9.6% % 9.3% 9.1% 9.2% 8.2% 9.8% 9.9% Information Technology 18.2% 17.8% 17.9% 20.8% 18.8% % 21.1% 19.2% 18.2% 18.5% 19.6% 21.2% % 20.3% 20.2% Tech ex. AAPL & GOOG 16.9% 17.1% % 17.9% 17.6% % 18.1% 17.5% % % 20.5% 21.2% 20.2% M aterials 9.5% 9.2% % % % % 9.8% % 8.2% % 10.8% 9. Real Estate 33.2% 33.9% % 35.6% 36.9% % % % 38.1% 36.1% % 35.3% Telecommunication Services 10.2% 10.7% 10.5% % 11.3% % 9.8% % % 10.1% 11.2% 11.7% 12.1% 11.6% Utilities 9.8% 8.9% 12.1% % 10.5% 9.8% 12.6% 8.7% 10.6% % 13.6% % % For institutional client and registered representative use only. Not for public viewing or distribution. Same underlying EPS growth trend, but higher PEs 4

5 Blended S&P 500 btm-up 3Q17 Sales and EPS growth by sector (blended with actual for reported and consensus for the rest) Sales y/y EPS y/y Blended btm up 3Q17 Sales and EPS y/y growth (Actual for reported and estimate for remaining) 1 5% 5% 1 15% 2 25% Cons Disc Cons Staples Energy 22% Financials 6% 2% 13 Health Care 3% 5% Industrials 5% Tech Ex AAPL & GOOGL % 13% Materials Real Estate 3% 2% 6% Telecom Utilities 2% 1% 1% S&P 500 S&P 500 ex Energy 5% 3% 3% S&P ex Energy, Fin. & Real Est 3% 5% 27% FANG 22% S&P 500 ex FANG For institutional client and registered representative use only. Not for public viewing or distribution. Same underlying EPS growth trend, but higher PEs 5

6 EPS revisions of S&P 500 and Stoxx S&P 500 EPS revision cycle (Jan 1= 100) 1.04 Stoxx600 EPS revision cycle (Jan 1= 100) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: FactSet, DeAM Source: FactSet, DeAM Source: Factset, Deutsche AM as of 10/5/2017. Past performance may not be indicative of future results. EPS revisions of Japan and Germany MSCI Japan EPS revision cycle (Jan 1= 100) MSCI Germany EPS revision cycle (Jan 1= 100) 1.02 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: FactSet, DeAM Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: FactSet, DeAM Source: Factset, Deutsche AM as of 10/5/2017. Past performance may not be indicative of future results. EPS revisions MSCI EM and MSCI AC AxJ 1.13 MSCI EM EPS revision cycle (Jan 1= 100) 1.19 MSCI AC AxJ EPS revision cycle (Jan 1= 100) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: FactSet, DeAM Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: FactSet, DeAM Source: Factset, Deutsche AM as of 10/5/2017. Past performance may not be indicative of future results. For institutional client and registered representative use only. Not for public viewing or distribution. Same underlying EPS growth trend, but higher PEs 6

7 Shooting stars: Russell 2000 quarterly analyst consensus btm-up EPS revisions Russell 2000 quarterly btm-up EPS revisions 2Q13 3Q13 3Q14 4Q13 2Q14 4Q14 2Q15 3Q15 4Q15 2Q16 3Q16 4Q16 2Q17 3Q17 4Q Q11 3Q11 1Q12 3Q12 4Q12 1Q13 1Q Q11 2Q12 1Q14 1Q15 1Q Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-17 6 Real GDP vs. real S&P ex Financials earnings growth Real S&P ex. Fin net income vs. real GDP (4-qtr sum y/y) 7yr rolling RSQ Source: BEA, OECD, S&P, Compustat, Deutsche AM as of 2Q17 (global GDP as of 1Q17). Past performance may not be indicative of future results. Nominal US GDP growth vs. S&P 500 EPS growth Recession US GDP Global GDP y/y % chg Correl: GDP: 12.1% EPS: 15.6% GDP: 6.8% EPS: 7.2% H GDP: 5.9% EPS: 11.6% H2007 GDP: 5.9% EPS: 14.7% Recession Nominal GDP S&P 500 EPS H2011-now GDP: 3.7% EPS: 5.1% Source: BEA, OECD, S&P, Compustat, Deutsche AM as of 2Q17. Past performance may not be indicative of future results. For institutional client and registered representative use only. Not for public viewing or distribution. Same underlying EPS growth trend, but higher PEs 7

8 Key Investment Forecasts Economic forecasts E Interest rates E Equities E 2018E Global GDP 3.1% 3.7% 2yr Treasury* % S&P U.S. GDP 1.6% 2.2% 10yr Treasury* 2.45% 2.6 price return % Capex 0.2% 3-5% 10yr TIPS* % dividend yield 2.1% 2.1% S&P total return estimate 11.5% 8.2% Fed Funds rate* LT IG Muni* 3.35% ~3. DXY Next 5%+ price move: Down Euro* IG Corp* 3.39% 3.5 Oil/bbl (WTI)* HY Corp* 6.46% 6.2 Risk of near-term correction: Moderate Source: Deutsche AM as of 10/9/2017. *Forecasts for September 2018 Allocations for taxable/u.s. dollar capital as of Oct 9, 2017 Deutsche AM View Current Long-term Considerations Fixed Income 35% 35% Expected return/risk Treasury/Agency 2 seek neg. correlation Municipals 1 > return, < liquid Corp. Credit 5% selective HY > IG Equities 6 55% Expected return/risk U.S. Equities 35% 4 S&P % 35% S&P is global + Tech Small Caps (R2) 0-1 Beyond beta booster? Foreign DM Equities 2 15% Unique? Valuation? Financials 5% 3% OW Foreign Banks Non-Financials 15% 12% OW DM Industrials Foreign EM 5% 0-1 Alternatives 5% 1 Is it truly uncorrelated? Real Estate/ Private Equity Commodities/FX/Vol/Alpha Tactical adjustments (<6mos): -1 from equity, +1 treasury = Down Deutsche AM view: allocations for taxable / USD capital S&P 500 Outlook Dare to ask: 2017 end target: 2450 Why not 2800 S&P cycle-high? 2800 = 18x 2019E EPS of ~$ end target: 2600 S&P 500 to reach 2800 by 2019 end on a long expansionary cycle of moderate growth. 2016A 2017E 2018E S&P avg. trailing 4qtr PE S&P EPS $119 $131 $ PE on trailing EPS DPS $46 $49 $ DPS/EPS 38% 37% 38% "S&P PE stands on the shoulders of bonds" S&P Quarterly EPS: Most favored sectors: 1Q16 $ Q17 $31.00 Healthcare, Tech, Financials 2Q16 $ Q17 $ Q16 $ Q17E $33.00 Least favored sectors: 4Q16 $ Q17E $34.00 Energy, Industrials Source: Deutsche AM as of 10/9/2017 Source: Deutsche AM as of 10/9/2017 For institutional client and registered representative use only. Not for public viewing or distribution. Same underlying EPS growth trend, but higher PEs 8

9 Deutsche AM S&P 500 Annual EPS Outlook Bottom-up Consensus (IBES) 2011A 2012A 2013A 2014A 2015A 2016A y/y 2017E y/y 2018E y/y 2017E y/y 2018E y/y ($) % of 2017 S&P 500 EPS (historical constituents) $97.82 $ $ $ $ $ S&P 500 EPS (current constituents) $ $ $ $ $ $ % $ % $ % $ % $ % $ % Sector ($ bn) Consumer Discretionary % % % % % % Consumer Staples % % % % Energy % % % % % Financials % % % % Health Care % % % % Industrials % % % % Information Technology % % % Materials % % % % Real Estate % % % % % Telecommunication Services % % % % % 30 85% Utilities % % % S&P 500 ($ bn) % % % % % % S&P ex. Financials & Real Estate ($bn) % % % % % S&P ex. Energy ($bn) % % % S&P ex. Tech ($bn) % % % % % % Energy & Financials & Real Est ($bn) % % % % % % S&P ex. Energy & Financials/RE ($bn) % % % % % % * Normalized 2017 are mid-cycle normal earnings estimates and the ratios represent normal relative to 2017E. Deutsche AM View Deutsche AM View: S&P 500 fair value by sector: Assuming a ~5.25% real cost of equity (CoE) for overall S&P 500 Market Value ($bn) Current 2017 PE 2017E Earnings ($bn) Normal Ratio Normal 2017E Earnings Accounting Quality Adjustment Fully Adjusted Earnings Real Steady CoE State Value Growth Premium 2017 Start Fair Value ($bn) 2017E Div idend Yield 2017 End 2017 End Fair Value Fair ($bn) Value PE Normalized 2017* S&P 500 EPS historical constituents represents the earnings per share (EPS) of S&P 500 index constituents at the time, while S&P 500 EPS current constituents represents the earnings per share of index constituents as of the date the data was compiled 6/30/ end Upside % Consumer 2, % % % 2,196 3% 2, % 2, Disc. Consumer 1, % ,718 1, % 1, Staples Energy 1, % % % % 1, Financials 3, % % ,300 3, % 3, % Banks 1, ,508 1, % 1, Health Care 3, % % 3,057 5% 3, % 3, % Industrials 2, % % % 1,958 1, , % Technology 5, % % 4,424 5% 4, , Materials % % % Real Estate % % Telecom % % % Utilities % % % S&P 500 ($ 21, % % 19,970 2% 20, % 21,464-2% bn) S&P 500 Index ($/sh) % % % % For institutional client and registered representative use only. Not for public viewing or distribution. Same underlying EPS growth trend, but higher PEs 9

10 Deutsche AM S&P 500 Intrinsic Valuation Model S&P 5 00 Capitalized EPS Valuation S&P Cost of Equity & Fair Book M ultiple Deutsche Asset Mgmt's 2017E S&P 500 EPS $ Fair long-term nominal return on S&P 500 index 7.25% Components of estimated fair S&P 500 return: DeAM's "normal 2017E" S&P 500 EPS $ Long-term real risk free interest rate 1.25% "Normal 2017E" EPS / 2017E EPS 101% + Long-term fair S&P 500 equity risk premium* 4.0 = Long-term real S&P 500 cost of equity 5.25% Accounting quality adjustment to pro forma EPS -$ Long-term inflation forecast 2.0 = S&P 500 nominal cost of equity 7.25% Normal 2017E S&P 500 EPS fair to capitalize $123 * S&P 500 ERP usually bps, w/ real 5% - 6.5% Key principle: steady-state value = normal EPS / real CoE Fair S&P 500 Market Value and Book Value Multiple S&P 500 EPS Capitalization Valuation 2016 end S&P 500 book value per share $800 Normal EPS / (real CoE - (EM/payout) - EM): Fair PB = Fair PE * normal aggregate ROE 2.92 S&P 500 intrinsic value at 2017 start 2333 Fair PE =(inc ROE-g)/(inc real ROE* (real CoE-real g)) 19.0 S&P 500 intrinsic value at 2017 end 2454 Implied S&P 500 fair value of book at 2017 start 2333 Implied fair fwd PE in early 2017 on 2017E $131 EPS 17.8 Steady-state PB = normal agg. ROE / real CoE 2.92 Implied fair trailing PE at 2017 end on 2017E $131 EPS 18.7 Confirmed by fair steady-state PE = 1 / real CoE 19.0 S&P 500 Dividend Discount Model S&P 500 Long-term EPS & DPS Growth Deutsche AM's 2017E S&P 500 DPS $49.00 Deutsche AM's 2017E S&P 500 aggregate ROE E dividend payout ratio 37% 2016 end S&P 500 book value per share $800 DB's "normal 2017E" S&P 500 DPS $49.00 DeAM's "normal 2017E" S&P 500 aggregate ROE 15.3% Normal dividend payout ratio 4 S&P EPS retained for true reinvestment 36% EPS directed to net share repurchases $30.00 Estimated ROE on reinvested S&P EPS 7.25% Normal share repurchase payout ratio 2 Economic margin (EM) or ROE-CoE 0.0 Total payout of S&P 500 EPS $79.00 Sources of long-term earnings growth: Total payout ratio of normal and quality adj. EPS 6 + Long-term inflation forecast Fair return on true reinvestment 1.86% S&P 500 DPS Discount Model + Value added return on true reinvestment 0.0 Normal DPS / (nominal CoE - DPS growth): = Long-term earnings growth 3.86% S&P 500 intrinsic value at 2017 start Growth from net share repurchases 1.29% S&P 500 intrinsic value at 2017 end 2454 = Long-term S&P 500 EPS/DPS growth 5.15% Implied fair forward yield on 2017E DPS of $ Fair normal dividend yield 2.1 Implied fair trailing yield on 2017E DPS of $ = Total long-term return at constant PE 7.25% Normal EPS / (real CoE-value added EPS growth) 2333 DPS discount model using true DPS (all payout) 2333 Value added growth premium in fair value est. Normal 2017E economic profit per share $80.50 S&P 500 EPS discountmodel 5 steps to value: 1) Estimate normalized S&P 500 EPS 2) Adjust normalized EPS for pro forma accounting quality 3) Estimate a fair long term real return on S&P 500 ownership (CoE) 4) Capitalize normalized and accounting quality adj. EPS at real CoE 5) Consider long term potential for value added growth opportunities Normal 2016E S&P 500 EPS $125 $130 $ $135 $ % Real cost of 5.25% equity % Source: Deutsche AM as of 10/9/2017 Normal 2017 earnings per share (EPS) represents an estimate of mid-cycle normal earnings. Equity Risk Premium (ERP) is the expected excess return that investing in the S&P 500 provides over the return from government Treasury bonds. For institutional client and registered representative use only. Not for public viewing or distribution. Same underlying EPS growth trend, but higher PEs 10

11 S&P 500 Sector and Industry views Market Weight (%) Price as of 10/6/2017 Source: Deutsche AM Allocated Weight (%) Sector 2017 PE 2018 Overweight 2017 PE PE 2018 Equal weight Underweight 2017 PE PE PE PE Ov er-weight 14.9% 18. Financials Banks Insurance Capital Markets Consumer Finance Div ersif ied Financial Serv ices % 18. Health Care Biotechnology Health Care Prov iders & Serv ices Health Care Equipment & Health Care Technology Lif e Sciences Tools & Serv ices Pharmaceuticals % 23. Inf ormation Communications Equipment Electronic Equipment Technology Internet Software & Services IT Services Sof tware Semiconductors Technology Hardware Storage & Peripherals Equal weight % Consumer Internet & Direct Marketing Retail Auto Components Distributors Discretionary Multiline Retail Automobiles Div ersif ied Consumer Serv ices Specialty Retail Hotels Restaurants & Leisure Leisure Products Household Durables Media Textiles Apparel & Luxury Goods % 3.5% Utilities Electric Utilities Independent Power Producers Multi-Utilities Water Utilities % 3. Real Estate REITs Real Estate Mgmt. & Development Under-weight 9.2% 8.5% Consumer Food & Staples Retailing Bev erages Staples Food Products Household Products Personal Products Tobacco % 6. Industrials Airlines Air Freight & Logistics Aerospace & Def ense Building Products Construction & Engineering Commercial Serv ices & Supplies Electrical Equipment Prof essional Serv ices Industrial Conglomerates Machinery Road & Rail Trading Companies & % 2. Materials Chemicals Construction Materials Containers & Packaging Metals & Mining % 3.5% Energy Energy Equipment & Serv ices Oil Gas & Consumable Fuels % 2. Telecom Div ersif ied Telecommunication Aggregate PE: Deutsche AM View Ov erweight Equalweight Underweight & 2018 EPS & 2018 PE Bottom-up Cons. EPS Bottom-up Cons. PE & 2018 Ex Energy PE Btm-up Cons. Ex Energy PE PE For institutional client and registered representative use only. Not for public viewing or distribution. Same underlying EPS growth trend, but higher PEs 11

12 Deutsche AM September 2018 strategic forecasts Source: Deutsche AM as of 10/9/2017. Past performance may not be indicative of future Deutsche Bank AG. All rights reserved. R (10/17) Not for public viewing or distribution. Same underlying EPS growth trend, but higher PEs 14

13 Deutsche AM September 2018 equity index forecasts Source: Deutsche AM as of 10/9/2017. Past performance may not be indicative of future Deutsche Bank AG. All rights reserved. R (10/17) Not for public viewing or distribution. Same underlying EPS growth trend, but higher PEs 14

14 Contact Information David Bianco Ju Wang , , Want to start to receive The Allocator and other materials from our thought leaders directly in your inbox? Go to the Subscription Center on deutscheam.com: And sign up and request the types of thought leadership materials you would like to receive by topic (The World, The Markets, and Asset Class Perspectives) or exclusively by one or more of our experts. For purposes of ERISA and the Department of Labor s fiduciary rule, we are relying on the sophisticated fiduciary exception in marketing our services and products through intermediary institutions, and nothing herein is intended as fiduciary or impartial investment advice. Deutsche Bank does not render legal or tax advice, and the information contained in this communication should not be regarded as such. The comments, opinions and estimates contained herein are based on or derived from publicly available information from sources that we believe to be reliable. We do not guarantee their accuracy. This material is for informational purposes only and sets forth our views as of this date. The underlying assumptions and these views are subject to change without notice. Past performance is not indicative of future returns. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect. Investments come with risk. The value of an investment can fall as well as rise and your capital may be at risk. You might not get back the amount originally invested at any point in time. Deutsche Asset Management represents the asset management activities conducted by Deutsche Bank AG or any of its Deutsche Bank AG. All rights reserved. R (10/17) Not for public viewing or distribution. Same underlying EPS growth trend, but higher PEs 14