EFTA01459057.pdf

Deutsche Bank Markets Research North America United States 20 November 2015 US Equity Insights David Bianco Jo Wang 2016 S&P EPS growth to surge to 5%! Sisal kit &m ist Falling standards of excellence this cycle. Is there an objective passing grade? Winn's' Tim We reduce 2016E S&P EPS from $128 to $125. We're unsure of the tone of Strategist language appropriate to describe this reduction. Slashing or even cutting is too harsh as our new estimate is merely 2.5% lower. This trimming shouldn't surprise investors given recent commodity and currency markets. So is $125 good S&P EPS in 2016? Is it bullish or bearish? It's only 5% growth, subnormal :).., ',re, k',.. lam,:::.? mid-cycle real EPS growth, but 10x better than 2015. Thus, S&P EPS growth is set to surge in 2016! But is there an objectively healthy S&P EPS growth rate? Price 2089.17 In this note we present our new 2016E S&P EPS and we explain why a healthy Next 5%+ move Balanced Risk S&P EPS growth rate is the nominal cost of equity less the dividend yield. 2014 2015E 2016E 2016 S&P EPS :Alt trorn $128 to $125 on stronger dollur lower oil ossurnptions Yearend Target 2058.90 2050. 2250- We have long cautioned that every 10% appreciation in the dollar vs. mature 2100 2300 currencies drags on S&P EPS growth by 2.5%. Every dime the Euro declines EPS $118 $119 $125 vs. USD hits S&P EPS by $1. Every $5/bbl oil price decline hits S&P EPS by $1, Target PIE 17.4x 17.4x 18.2x net of small benefits outside of Energy, Industrial Capital Goods & Materials; 17.7x Current P/E 17.6x 16.7x which all suffer. Airlines, Consumer Staples & Discretionary firms benefit from 0PS $38.30 $41 $44 lower oil prices, but most of the cost savings is passed forward to customers. We lower our average 2016 Euro assumption from about $1.10 to $1.05. We raise our 2016 avg. DXY assumption from about 95 to 100. We lower our 2016 'Related recent research 0,11,1 avg. oil price assumption from $60/bbl to $55/bbl and natural gas to $2.75. We S&P should finish the year In 16 Nov 2015 also tempered our growth assumptions at US Retailers, Housing and Banks. black, but more red ahead for 2015 did not have healthy underlying revenue or EPS growth ex oil and dollar Energy S&P sales and operating EPS growth was broadly weak in 2015. Weakness Amazing margins, but mind the 8 Nov 2015 extended beyond commodity producers and FX drags at multinationals. A GAAP surge in airline profits masked a significant Industrial Cap Goods profit decline. A structural slowing of 1 Nov 2015 Revenue was flat at Financials with EPS growth from less litigation than 2014. Industrials: Investing around this late cycle risk No growth at Consumer Staples despite lower input costs. Good growth at Don't pull the plug on Health 23 Oct 2015 Retailers, but disappointing given the macro tailwinds owing to fierce price Care competition. Strong at auto, but home builders disappointed. The strongest growth was at Health Care and consumer oriented Tech firms. Corporate tech spending on equip. and software remains very sluggish and chip makers were VS Entail( Strategy Baskets flattish on earnings given slow PC, handset and weak industrial end markets. elejenil bee cker g Ex. Energy, Financials, HC and AAPL. AMZN & GOOG 2015 S&P EPS growth is High Foreign Cash (Repatriation DBUSHIFC -2.5%; this is the underlying trend with -4% FX drag that should fall to -1.5%. Beneliciaries) Stronger revenue growth is key to achieving healthy S&P EPS growth in 2016 Big-Cap Reasonable PE Tech DBUSBRTE Strong revenue growth at Health Care, better capex on productivity enhancers Challenged Industrial Capital DBUSCICG like tech equip/software, slower but still strong revenue growth at consumer Goods oriented big cap Tech are key to our 4% S&P sales growth, 1% share shrink US Domestic Strength DBUS0MST and flat net margin estimates for 2016. Some cyclically risky sectors like Auto, Airlines, Chemicals & Semiconductors must avoid losing any earnings power. Margin expansion is possible but upside counterbalanced by downside risk Fierce price competition at Retailers, more global competition at Industrials and the political threats at Health Care pose some sales risk, but mostly margin risk. There is also tax rate risk. Many are concerned about wage preqmire on margins, but this is not a major risk for S&P firms. However, a tighter than expected labor market could lead to more Fed hikes than expected and thus EPS risks via dollar, oil or PE risk via credit market or a Tsy yield jump. Fed hikes are a small boost to S&P EPS. delineates healthy from unhealthy S&P EPS growth and supports an Our 1 year target of 18x trailing S&P EPS uses a 5.5% real and 7.5% nominal CoE. EPS is retained, so real EPS g must = real CoE - div yld to justify a PE = 1/real CoE. 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) DB-SDNY-0119270 CONFIDENTIAL SDNY_GM_00265454 EFTA01459057