3Q likely sets EPS trend for the rest of this cycle

Transcription

1 The Allocator October 27, Q likely sets EPS trend for the rest of this cycle David Bianco Chief Investment Strategist, Americas Deutsche Asset Management Low base effect vanishes in 3Q17, 5-7% trend EPS growth going forward In 1Q and 2Q2017, the S&P delivered strong earnings per share (EPS) growth of 16% and 12%, but these were off the low bases from a year ago when S&P earnings were depressed amid the profit recession. This effect went away in 3Q17 as S&P earnings growth returned to its 5-7% trend. It is still healthy EPS growth, and we think this will continue as trend for the rest of this cycle without tax cut benefits. Our 2018E S&P EPS is $140, 7% y/y. If corporate tax rate is cut from 35% to 25%, it is likely to be $145-$150. 3Q EPS tracker: Btm-up EPS is $33.06, boosted by Tech s sizable beats With 68% of S&P earnings reported, bottom-up (btm-up) 3Q EPS is $ Tech companies scored an impressive 12% weighted avg. EPS beat, EPS beat ex Tech is merely 2.. Weighted avg. sales beat is 1.6% and 1.5% ex Tech. Analysts made sizable last minute cuts on hurricane impact and the underwhelming results from companies reported ex Tech. The Industrials sector missed on EPS by 4.7%, but ex GE the sector actually beat by 3.1%. 3Q EPS growth at Industrials is still weak at 2. y/y and 3.2% y/y ex GE. We question the recent rally of the sector on its higher while weaker EPS growth than the overall S&P 500. We think S&P 3Q EPS will finish at about $33.25, slightly above our long standing $33 estimate, 7% y/y and 8% ex Energy & Financials. Tech continues to shine with strong sales and EPS growth Other than Energy, Tech has the strongest EPS and sales growth. Btm-up 3Q Tech EPS is 19. y/y (18.2% ex AAPL & GOOGL), followed by Health Care (6.1%) and Materials (5.7%). All other sectors have low single digit EPS growth or EPS decline. Sales growth is also strongest at Tech (11.5% y/y), followed by Materials (7.) and Health Care (4.6%). Financials btm-up 3Q EPS is - 7.5% y/y because Insurance companies were hit hard by the hurricanes, ex Insurance 3Q Financials EPS growth is 7.7% y/y. We expect Tech to continue to lead growth in 2018, together with Financials whose profits will be helped by gradually rising interest rates. Both sectors should grow their earnings by 8-1 in Over 9 of Energy sector by earnings weight have reported. Btm-up 3Q Energy profits are $10.1bn. This will put the Energy sector earnings ytd at $26.8bn and make our $35bn 2017 estimate well achievable if WTI oil price stays around $50 through year end. Btm-up 3Q non-gaap net margin is 10.8%, record high ex En & Fin S&P non-generally accepted accounting principles (non-gaap) net margin is 10.8% in 3Q17, slightly above 10.7% a year ago. It came down from the 11. record high reached in 2Q17, but mostly due to the hit to the Insurance industry. Ex Energy and Financials, 3Q S&P net margin reached new record high of 10.9%. We think S&P net margins are sustainable at above 10.5% levels for the rest of this cycle. The 5-7% EPS trend growth for the next few years will be 4-5% sales growth, flattish net margins, and 1-2% from share buybacks. S&P s are not threatened unless 10yr Treasury yields climb above 3% 10yr Treasury (Tsy) yields rose from ~2% in Sept to ~2. now on improved U.S. and global economic growth prospect, higher inflation expectations, and rising probability of a December U.S. Federal Reserve (Fed) hike. We don t think interest rates at current levels are any threat to S&P yet. Real 10 year yields are still low at ~50bps. Unless there are signs that 10yr Tsy yields are moving to exceed 3% (real yields above 1%) in the near term, we think equity valuations should be well supported even though at a 25% premium to history. We expect long term interest rates to only climb gradually given the current macro backdrops: economy healthy but not overheated, inflation contained and below real GDP growth, and Fed will continue its gradual pace in rate normalization and balance sheet unwind. This is a good environment for healthy equity returns. Contributor - Ju Wang, Investment Strategist & Portfolio Analyst 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 on trailing EPS DPS $49 $53 Allocations for taxable / USD capital as of October 27, 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 Long Duration Bond Substitutes Cyclical Stocks Value Stocks Growth Stocks Defensive Stocks Oil /Copper Stocks Up Source: Deutsche AM. All opinions and claims are based upon data on 10/27/2017 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. Yields Up Yields Down HY Bonds High Risk β For institutional client and registered representative use only. Not for public viewing or distribution.

2 3Q earnings season statistics (based on companies that have reported) 3Q17 Summary (Based on reported companies) % of EPS # Cos EPS (% of co's) EPS EPS Sales (% of co's) Sales Sales reported reported % beat % miss surprise (%) y/y (%) % beat % miss surprise (%) y/y (%) S&P % 2 3.6% % 22% 1.6% 6.8% S&P 500 ex. Financials & Real Est 64.6% % 23% 4.5% 13.3% 49% 27% 1.5% 7.6% S&P 500 ex. Energy 67.1% % 2 3.3% 7.8% 47% 22% 1.1% 4.5% S&P ex. Tech 71.9% % 26% % 46% 25% 1.5% 6. S&P ex. Energy, Financials & Real Est % 23% % 48% 27% 0.9% 4.9% Consumer Discretionary 50.7% 36 56% 31% 6.6% 2. 42% 33% % Consumer Staples 65.2% 15 73% % 53% 33% 0.7% 4.3% Energy % % 115.2% 6 33% 5.2% 26.9% Financials 88.2% 52 71% 23% % 5 8% 2.2% 2. Health Care % 4.7% 7.9% 59% 18% 0.2% 5.3% Industrials 83.9% % -4.7% 1.5% 39% 33% 0.9% 6.3% Information Technology 54.6% % % 63% 6% % M aterials % 33% 9.3% 12.2% 58% 8% 2.7% 11.3% Real Estate 51.2% % -0.2% 5.6% 21% 7% 0.8% 2.9% Telecommunication Services % % -0.5% Utilities 31.1% 9 67% 33% -0.9% -2.9% 11% 89% -5.5% -1.6% 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) For institutional client and registered representative use only. Not for public viewing or distribution. 3Q likely sets EPS trend for the rest of this cycle 2

3 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 grow th (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% 10. S&P 500 ex. Energy 5.5% 7.7% 10.8% % 12.1% % 3.3% 8.3% 0.2% % 7.5% 5.2% % 4.3% 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% 3. 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% % 7.3% 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% % 7.6% FANG (FB, AM ZN, NFLX, Google) 22.7% % 19.8% 23.3% -3.2% 16.9% 34.7% 36.8% 21.6% % % 43.2% -6.5% 36.2% 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% % 5.8% 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% 5.6% 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% % 6.3% Consumer Discretionary 5.8% 7.6% -2.1% 15.3% % % % 23.6% 14.2% 8.1% 5.2% 10.9% 7.7% 4.1% 2.9% Multiline & Specialty Retail % 23.3% 16.1% 17.5% 11.6% % 10.1% 12.1% 9.1% 9.7% 10.8% % 7.8% 4.1% Consumer Staples 4.3% % 0.2% 3.8% 4.1% % -1.2% 0.1% 0.7% % 7.3% 4.6% 4.7% 3.1% 4.1% Energy -0.3% % % -57.1% % -59.9% % -68.1% 0.8% -78.1% NA 488.1% 153.5% 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% -7.5% 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% -15.5% Health Care 12.7% 19.1% 18.2% % % 12.3% % 10.7% 7.3% 7.9% 6.6% 8.6% 6.6% 7.6% 6.1% 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% 3.8% 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% % 19. 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% 18.2% M aterials -0.8% 8.9% 18.2% -0.1% 6.5% 0.9% % -14.8% -4.1% -9.3% -6.9% 8.9% % 6.9% 5.7% Real Estate 32.3% 23.1% % 12.7% 7.8% 11.9% 12.7% % 4.1% 2.5% 9.7% 5.1% % 1.7% 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% -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% -4.8% Sales grow th (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% 4.8% 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% 5.6% 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% 3. 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% 4. 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% 3.6% 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% 3.3% FANG (FB, AM ZN, NFLX, Google) 19.5% 20.8% 18.7% 14.1% 17.9% 15.8% 17.7% % % 29.5% 28.1% 25.2% % 30.7% FANG & AAPL % 15.2% 23.3% 14.7% % % 18.2% 2.3% 4.8% 7.7% % 14.7% 17.3% 20.3% 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% 4.3% 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% 4.2% 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% 2.8% 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% 0.1% 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% % -0. Financials ex. BAC, C & JPM 1.2% % 3.6% 4.3% % -1.9% 0.1% -1.7% 1.1% % % -1. 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% 0.5% 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. 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% 11.5% 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% % 11. M aterials 2.1% 3.3% 2.2% -2.9% 0.2% -10.1% -9.9% % % % 6.1% -1.9% 8.7% 8.8% 7. 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% -0.8% Utilities 15.9% 3.3% 5.1% 8.9% 8.2% -2.1% -4.7% % -7.3% -11.7% % % 7.2% 6.9% N et 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% % 9.5% S&P ex. Energy, Fin & Real Est 9.5% 9.9% 10.1% 10.2% 9.9% 10.1% % 10.6% % % 10.5% % 10.9% 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% 10.9% FANG (FB, AM ZN, NFLX, Google) 11.7% 11.1% % 10.5% 10.1% 11.3% 10.9% 11.5% % % 12.8% 13.3% 10.1% 12.9% 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% 15.8% 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% 10.8% Consumer Discretionary 6.3% % 7.1% 6.9% 6.7% 7.5% 7.8% 7.9% % 7.6% 7.5% 7.5% % 7.7% 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% 4.2% 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% 11.5% 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% 10.8% Industrials 7.6% % 9.3% % 9.5% 9.9% 9.5% 9.5% % 9.3% % 8.3% 9.6% 9.3% Industrials ex. BA 7.7% 9.6% 9.9% 9.5% 9.3% 8.7% % % 10.6% 9.3% 9.2% % 9.9% 9. 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% 9.3% 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% 20.9% Tech ex. AAPL & GOOG 16.9% 17.1% % 17.9% 17.6% % 18.1% 17.5% % % 20.5% 21.2% 20.8% 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% % 35.7% 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. 3Q likely sets EPS trend for the rest of this cycle 3

4 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 3% Cons Staples 27% Energy Financials -8% 15 Health Care 5% 6% Industrials 2% Tech Ex AAPL & GOOGL 11% 11% 18% 19% Materials 6% 7% Real Estate 2% 3% Telecom -1% -2% Utilities -5% S&P 500 S&P 500 ex Energy 5% 3% 7% S&P ex Energy, Fin. & Real Est 7% 31% FANG S&P 500 ex FANG 6% 36% For institutional client and registered representative use only. Not for public viewing or distribution. 3Q likely sets EPS trend for the rest of this cycle 4

5 Change in S&P 500 btm-up 3Q17 EPS since 6/30/2017 (on current S&P 500 constituents) 8% Change in btm-up 3Q17 EPS since 6/30/ % 0.3% 1.8% - -8% -2.7% % % -2.2% % -2.6% -0.9% -4.5% -12% -16% -11.9% -12.6% -13.2% 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 Change in S&P 500 btm-up 2017 EPS since 6/30/2017 (on current S&P 500 constituents) 2% -2% - Change in btm-up 2017 EPS since 6/30/ % -0.6% -0.1% -0.2% -0.7% -0.5% % -2.9% % 2.1% % 0.2% 1.3% -6% -11.1% 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. 3Q likely sets EPS trend for the rest of this cycle 5

6 3Q17 S&P 500 EPS (earnings weight) to be reported each week 45% 4 3Q S&P 500 EPS (earnings weight) to be reported each week 40.5% 35% 3 25% 2 15% 1 5% 4.9% 7.8% 15.7% 19.1% 5.3% % Pre-season # 25 W1 (10/9-10/13) #9 W2 (10/16-10/20) #56 W3 (10/23-10/27) #183 W4 (10/30-11/3) #137 W5 (11/6-11/10) #45 W6 (11/13-11/17) #20 W7(11/20-11/24) #14 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 4 #137 Week 5 #45 Week 6 #20 For institutional client and registered representative use only. Not for public viewing or distribution. 3Q likely sets EPS trend for the rest of this cycle 6

7 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 10/27/2017. *Forecasts for September 2018 Allocations for taxable/u.s. dollar capital as of Oct 27, 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 S&P EPS $119 $131 $ on trailing EPS DPS $46 $49 $ DPS/EPS 38% 37% 38% "S&P 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 10/27/2017 Overweight allocation Equities 6 Underweight allocation Fixed income 35% Source: Deutsche AM as of 10/27/2017 For institutional client and registered representative use only. Not for public viewing or distribution. 3Q likely sets EPS trend for the rest of this cycle 7

8 Deutsche AM S&P 500 Annual EPS Outlook Bottom-up Consensus (IBES) Deutsche AM View Normalized 2017* 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 Serv ices % % % % % 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 ($bn) % % % % % % * Normalized 2017 are mid-cycle normal earnings estimates and the ratios represent normal relative to 2017E. Deutsche AM View: S&P 500 fair value by sector: Assuming a ~5.25% real cost of equity (CoE) for overall S&P 500 Market Value ($bn) Current E 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 Fair Value ($bn) 2017 End Fair Value S&P 500 EPS historical constituents represents the earnings per share (EPS) of S&P 500 index constituents at the time, while S&P 500 EPS current constituents represents the earnings per share of index constituents as of the date the data was compiled 6/30/ end Upside % Consumer 2, % % % 2,196 3% 2, % 2, Disc. Consumer 1, % ,718 1, % 1, % Staples Energy 1, % % % % 1, % Financials 3, % % ,300 3, % 3, % Banks 1, ,508 1, % 1, % Health Care 3, % % 3,057 5% 3, % 3, Industrials 2, % % % 1,958 1, , % Technology 5, % % 4,424 5% 4, % 4, % Materials % % % Real Estate % % Telecom % % Utilities % % S&P 500 ($ 22, % % 19,970 2% 20, % 21,466-3% bn) S&P % % % % % Index ($/sh) >5% between -5% and 5% <-5% For institutional client and registered representative use only. Not for public viewing or distribution. 3Q likely sets EPS trend for the rest of this cycle 8

9 Deutsche AM S&P 500 Intrinsic Valuation Model S&P 500 Capitalized EPS Valuation S&P 500 Cost of Equity & Fair Book Multiple 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 * normal aggregate ROE 2.92 S&P 500 intrinsic value at 2017 start 2333 Fair = (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 in early 2017 on 2017E $131 EPS 17.8 Steady-state PB = normal agg. ROE / real CoE 2.92 Implied fair trailing at 2017 end on 2017E $131 EPS 18.7 Confirmed by fair steady-state = 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 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 10/27/2017 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. 3Q likely sets EPS trend for the rest of this cycle 9

10 S&P 500 Sector and Industry views Ov er-weight Equal weight Under-weight Price as of 10/27/2017 Source: Deutsche AM Market Allocated Sector 2017 Weight (%) Weight (%) 14.9% 18. Financials 16.4 Aggregate : Deutsche AM View 2018 Overweight Equal weight Underweight 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 Sof tware & Serv ices IT Serv ices Sof tware Semiconductors Technology Hardware Storage & Peripherals % 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. & Dev elopment % 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 Ov erweight Equalweight Underweight & 2018 EPS & Bottom-up Cons. EPS Bottom-up Cons & 2018 Ex Energy Btm-up Cons. Ex Energy For institutional client and registered representative use only. Not for public viewing or distribution. 3Q likely sets EPS trend for the rest of this cycle 10

11 Deutsche AM September 2018 strategic forecasts Source: Deutsche AM as of 10/27/2017. Past performance may not be indicative of future Deutsche Bank AG. All rights reserved. R (10/17) Not for public viewing or distribution. 3Q likely sets EPS trend for the rest of this cycle 14

12 Deutsche AM September 2018 equity index forecasts Source: Deutsche AM as of 10/27/2017. Past performance may not be indicative of future Deutsche Bank AG. All rights reserved. R (10/17) Not for public viewing or distribution. 3Q likely sets EPS trend for the rest of this cycle 14

13 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. 3Q likely sets EPS trend for the rest of this cycle 14