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Subject: FW: US Equity Insi hts - Trump: the huge picture for stocks From: Stewart Oldfield Date: Mon, 21 Nov 2016 10:28:42 -0500 To: Richard Kahn ‹ > From: David Bianco, Deutsche Bank [mailto: Sent: Friday, November 18, 2016 3:55 PM To: Stewart Oldfield Subject: US Equity Insights - Trump: the huge picture for stocks Deutsche Bank - Equity Research - North America US Equity Insights - Trump: the huge picture for stocks 18 November 2016 (30 pages/ 2303 kb) Download the complete report: http://pull.db-gmresearch.com/p/- 2035-59D3/93036413/0900b8c08c0f591b.pdf Trump and stocks: S&P 500 likely to reach 2250 by the inauguration In the first week of President elect Trump, most of our investor conversations centered on their concerns about a higher fiscal deficit lifting Treasury yields and pressuring PEs and a stronger dollar/ weak oil prices pressuring the EPS outlook and the possibility of protectionism. While we don't ignore such risks, we think the market is under appreciating the likely big boost to S&P EPS from a lower corporate tax rate and the boost to Bank profits from rising yields (and lower pension expense) and the much higher chance now of a long lasting economic expansion that rivals the 10 year US record. We're more confident now that the S&P will reach 2500 in 2018 before suffering its next bear market. With corp. tax cuts S&P EPS should be at least $130 & $140 in 2017 & 2018 We're unsure how much the US corporate tax rate will be cut, but we think a significant cut is likely, and we see —25% as most likely because it aligns with the OECD avg., it shouldn't raise the deficit more than 0.75% of GDP, it significantly reduces repatriation taxes and it provides small businesses that want to reinvest their profits for growth a more tax efficient alternative than pass trough entities generally taxed at higher individual EFTA01424606 rates; this alternative would be especially attractive if the C class dividend tax rate is not over 15%. We're unsure what happens with personal income taxes, but we don't see cutting the top marginal income tax rate as the top near-term priority if C class treatment can be made more attractive to small businesses. Every 5pt cut in the US corporate tax rate from 35% boosts S&P EPS by $5. Assuming that the US adopts a new corporate tax rate between 20-30%, we expect S&P EPS of $130-140 in 2017 and $140-150 in 2018. We raise our 2017E S&P EPS to $130. Treasury yields have a long way to climb before threatening our PE targets We're comfortable with the 17-18 trailing PE that our 2350 S&P target for 2017 end and 2500 in 2018 imply, provided 10yr yields don't exceed 3% in 2017 or 3.5% in 2018. We stress our over-weights on big Banks and Health Care and see upside at Tech, Cons. Disc. and Utilities, but find valuations too demanding at Energy, most Industrials & Materials. Staples have FX risk. The pace of the climb in yields is as important as the destination, as any rapid climb in yields could shock real estate and fixed income and weigh on growth. However, this is why we think Congress will try to find the right balance in its fiscal package and why we think it important that the Fed hike at a moderate pace to prevent the labor market from overheating and to slow the ascent in long-term yields. If you are OW bonds or need a reliable real yield asset then look to Utilities Utilities benefit from: 1) a lower US corp tax rate given nearly 100% US profits and thus no FX risk, 2) likely continued 15% tax rate on dividends vs. income tax rates for interest income and the 3.8% ACA tax is likely dropped, 3) more Federal infrastructure grants and loans for transmission upgrades, 4) a safe haven for retirees and institutions looking to reduce fixed income exposure. We expect corporate sponsored pension plans to reduce their equity allocation in favor of long duration IG corporate bonds, but public sponsored pensions and retirees will still likely seek reliable real yield bond substitutes like Utilities. You've got a lot of questions about corporate taxes, we have lots of data Inside we include many summary exhibits of our data on S&P 500 effective tax rates by sector, industry and company, both the domestic and foreign pieces. David Bianco Ju Wang Winnie Nip Please visit our group webpage at https://gm.db.com/welcome.html?/ger/- analyst/Analyst.eqsr?analystlD=39531 EFTA01424607 {Autobahn Mobile - now available on iPhone and iPad. Click here to download 'Deutsche Bank Autobahn' in the App Store: https://itunes.apple.com/gb/app/- deutsche-bank-autobahn/id646407534} Autobahn Mobile - now available on iPhone and iPad. Click here to download 'Deutsche Bank Autobahn' in the App Store: https://itunes.apple.com/gb/app/- deutsche-bank-autobahn/id646407534 Click/ copy this link into a browser to access the report: http://pull.db- gmresearch.com/p/2035-59D3/93036413/0900b8c08c0f591b.pdf. If you have any difficulty accessing the report, please forward this email with the word 'PDF' in the subject line to [email protected]. After 90 days you can access the report on our web site: http://gm.db.com. You have received this mail because you have subscribed to David Bianco For changes to your current research subscription, visit https://gm.db.com/- rsm or email Please refer to the applicable legal disclaimers in the full report. Mail Reference: This communication may contain confidential and/or privileged information. If you are not the intended recipient (or have received this communication in error) please notify the sender immediately and destroy this communication. Any unauthorized copying, disclosure or distribution of the material in this communication is strictly forbidden. Deutsche Bank does not render legal or tax advice, and the information contained in this communication should not be regarded as such. EFTA01424608