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January 7, 2011
United States
US Equity Views
Portfolio Strategy Research
Raising EPS forecasts again; 19% return to our new target of 1500
We are raising both our 2011 and 2012 S&P 500 earnings estimates by $2 per share to $96 and
$106, reflecting annual growth of 14% and 11%, respectively. We boost our year-end 2011 target to
1500 representing a potential total return of 21% including the 2% dividend yield. Our 3- and 6-
month interim targets are 1325 and 1400, respectively. A re-accelerating US economy will drive 8%
sales growth and explains our pro-cyclical recommendations. Focus on stocks with high beta to
both the US economy and the stock market and firms with rising return on equity (ROE).
We expect 2011 EPS will reach a new high 5% above the prior peak
Goldman Sachs US GDP forecasts are above consensus for 2011 (3.4% vs. David J. Kostin
(212) 902-6781 david.kostin@gs.com
2.6%) and 2012 (3.8% vs. 3.1%). A 50 bp shift in GDP growth equals $2 per Goldman Sachs & Co.
share in EPS and every 50 bp shift in profit margins equals $4 per share.
Stuart Kaiser, CFA
Raising our S&P 500 year-end 2011 price-target to 1500 (212) 357-6308 stuart.kaiser@gs.com
Goldman Sachs & Co.
We forecast that at year-end 2011 the nominal size of the US economy will
be 5% larger than today, the level of forward EPS will be 11% higher, the Amanda Sneider, CFA
P/E will have expanded by 8% or 1 point, and S&P 500 will be 19% higher. (212) 357-9860 amanda.sneider@gs.com
Goldman Sachs & Co.
Themes: Buy (1) Cyclicals; (2) High beta; and (3) ROE growth
Yi Zhang
Our best ideas for 2011: (1) Long Cyclicals/short Defensives; (2) Stocks with (212) 357-6003 yi.g.zhang@gs.com
high beta to both the US economy and stock market; (3) Growth in return Goldman Sachs & Co.
on equity; (4) High Sharpe ratios; (5) High dividend growth.
Goldman Sachs S&P 500 3-month, 6-month and 12-month price targets
1,700
1,600 1500
S&P 500 Forecasts
1,500 1400
1325
1,400
1258
1,300
12-Month
1,200 (+19%)
6-Month
1,100 3-Month (+11%)
1,000 (+5%)
900
800
700
600
Mar-09
Jun-09
Mar-10
Jun-10
Mar-11
Jun-11
Mar-12
Dec-08
Sep-09
Dec-09
Sep-10
Dec-10
Sep-11
Dec-11
Source: IDC via Factset and Goldman Sachs Global ECS Research.
The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, 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. For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC
certification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts
with FINRA in the U.S.
The Goldman Sachs Group, Inc. Goldman Sachs Global Economics, Commodities and Strategy Research
January 7, 2011 United States
2011 US equity market outlook: The road to 1500
The US economy is 16% larger at the end of 2010 than it was five years ago ($14.7
trillion versus $12.6 trillion). The forward EPS estimate for the S&P 500 has climbed by
18% to our upwardly revised forecast of $96 compared to an NTM forecast of $81 at the
end of 2005. However, the S&P 500 Index ended 2010 just 1% above the level at year-end
2005. The forward P/E multiple has contracted by 15% to 13.1x from 15.4x.
Looking ahead to the end of 2011, we forecast the S&P 500 Index will have rallied
19% to our target of 1500 from 1258 at year-end 2010. Our economics research
colleagues expect the US economy will be 5% larger in nominal terms than today ($15.3
trillion vs. $14.7 trillion) and we expect the level of forward EPS will be 11% higher ($106 vs.
$96). We implicitly forecast the forward P/E multiple will have expanded by 8% or one
multiple point to 14.1x from the current 13.1x (see Exhibit 1).
Exhibit 1: The economy and market at year-end 2005, 2010 and 2011E
Year-end '05-'10 Year-end '10-'11
2005 2010 Change (%) 2011 Target Change (%)
Nominal GDP ($tn) $12.6 $14.7 16% $15.3 5%
S&P 500 1248 1258 1 1500 19
EPS (NTM) $81 $96 18 $106 11
P/E (NTM) 15.4x 13.1x (15) 14.1x 8
VIX 12.1 17.8 47 N/A N/A
Source: BEA via Haver, IDC via FactSet, I/B/E/S and Goldman Sachs Global ECS Research.
Our DDM implies a 12-month forward fair value of the S&P 500 of 1500. If realized, the
19% full-year return would be 0.6 standard deviations above the 80-year average of 7% (see
Exhibit 2). Our model implies that the price gain during the next 12 months will be a
function of both earnings growth and a declining cost of equity, which leads to a forward
P/E expansion as US economic growth continues above trend throughout 2011 and 2012.
Exhibit 2: Our 2011 target of 1500 falls within 0.6 std. devs of the average return since 1928
3.5%
Annual S&P 500 Return Distribution (since 1928)
2011 Year-end
Avg = +7% Price Target of 1500
3.0% = +19% (0.6 Stdev above Avg)
2010
Return
+13%
2.5% -1 Stdev +1 Stdev
= -14% = +28%
% of observations
2009
2.0% Return
+23%
1.5%
2008
1.0%
Return
-38%
0.5%
0.0%
(40) (35) (30) (25) (20) (15) (10) (5) 0 5 10 15 20 25 30 35 40 45
Annual Price Return (%)
Source: Bloomberg, FactSet, and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 2
January 7, 2011 United States
We are raising our 2011 S&P 500 earnings estimate to $96 (from $94) and our 2012
estimate to $106 (from $104). Our new estimates imply EPS growth of 14% in 2011 and
11% in 2012. Faster economic growth drives our sales growth forecasts of 8% in 2011 and
7% in 2012. We expect only slight margin expansion to 8.8% in 2011 and 9.0% in 2012.
Earnings of $96 per share in 2011 would surpass the previous peak EPS of $91
registered during the four quarters ending 2Q 2007 (see Exhibit 3). S&P 500 EPS
rebounded from a low of $40 in 3Q 2009 to reach $79 during the four quarters ending 3Q
2010. We expect full-year 2010 EPS will reach $84 equal to 92% of the previous peak.
Our year-end 2011 S&P 500 price target of 1500 is roughly 4% below the previous
S&P 500 peak of 1565 reached in October 2007. Our target implies a much faster index
recovery than during the prior cycle when it took seven years to exceed the 2000 peak level.
We forecast the S&P 500 will reach 1500 on higher earnings than previous occasions,
offering more attractive valuation. Our 2012 EPS forecast of $106 implies a forward
multiple of 14.1x. In May 2007, the market reached 1500 on a 15.5x forward multiple.
We raise our 3-month price target to 1325 and our 6-month price target to 1400
reflecting returns of 5% and 11% from current levels. Conditional return and options-
implied distributions suggest a 30-40% likelihood of reaching our 3 month target.
Exhibit 3: We expect 2011 S&P 500 EPS will exceed its prior peak as the index level approaches the Oct 2007 peak
as of January 3, 2011
1,700 110
09-Oct-07
24-Mar-00 New Peak = 1565 2011 EPS $106
Peak = 1527 above 100
$96
prior peak
1,500 1500 12-mo
Target
90
S&P 500 1400 6-mo
Price $84 Target
1,300 1325 80
3-mo
Target
S&P 500 Price
Jun-07
Peak EPS = $91 Current 70 S&P 500 EPS
SPX
1,100 1272
Sep-00
Peak EPS = $57 60
Mar-04
New Peak EPS
900 50
S&P 500
EPS
40
700
Goldman Sachs
09-Mar-09 Forecasts 30
Low = 678
500 20
30 x S&P 500 P/E
25 x
P/E
20 x NTM Peak (LTM)
26x
15 x
P/E 2011E Year-end
10 x 14x
(NTM)
NTM Trough
9x
5x
Dec-96
Dec-97
Dec-98
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Source: FirstCall, Compustat, IDC via Factset, and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 3
January 7, 2011 United States
Investment Recommendations: Our best ideas for 2011
Our best ideas for 2011 emphasize economic growth and a rising stock market.
Accordingly we favor investment ideas with cyclical exposure and beta to the market. Our
thematic trade recommendations emphasize high beta, growth in return on equity, high
risk-adjusted potential returns (Sharpe Ratio), and returning cash to shareholders.
1. Long Cyclicals (GSSBCYCL) / Short Defensives (GSSBDEFS)
We have two variations on how to implement a cyclical and pro-growth view. For mutual
funds we recommend overweighting Information Technology, Financials, and Energy
and underweighting Health Care, Consumer Staples, and Utilities. The business cycle
(represented by ISM), the interest rate environment, and the growth differential between
US and non-US economies suggest cyclical sectors should outperform. Such a tilt is
consistent with our forecast that the US economy will re-accelerate during 2011 and 2012.
For hedge funds we recommend implementation via buying <GSSBCYCL> and selling
<GSSBDEFS>. These baskets divide the 24 S&P 500 industry groups based on their betas
to the Wavefront US Growth basket (GSWBGDPA). Stocks within each industry group with
an economic beta greater than the market comprise the Cyclicals basket and stocks within
industry groups with economic betas less than that of the S&P 500 comprise the Defensive
basket. The two baskets collectively account for 100% of the S&P 500 market capitalization.
2. Dual Beta (Bloomberg ticker: GSTHBETA)
The 50 stocks in this sector-neutral basket have the highest combined beta to both
the US stock market and the US economy. We define sensitivity to the market in
traditional terms as beta to the S&P 500 and sensitivity to the US economy in terms of beta
to the Goldman Sachs Wavefront Growth basket. If consensus GDP growth prospects for
2011 and 2012 are revised upwards from the current 2.6% and 3.1%, respectively, to the
Goldman Sachs forecasts of 3.4% and 3.8%, and the overall stock market performs well,
then this portfolio of high “dual beta” stocks should outperform.
3. ROE Growth (GSTHGROE)
Companies that generate superior growth in return on equity (ROE) have consistently
outperformed the S&P 500. Our sector-neutral basket of 50 stocks is comprised of firms in
each sector with the highest forecast ROE growth over the next 12 months. As evidence of
the US economic expansion accumulates, we expect investors will focus on EPS growth
and capital allocation in the stock selection process and this basket should outperform. The
median stock in the basket trades at 3.4x price/book with expected 2011 ROE growth of
31% (from 15% to 19%) versus 2.6x and 8% growth (14% to 15%) for the S&P 500 median.
4. High Sharpe Ratio Stocks (GSTHSHRP)
Our sector-neutral basket of 50 stocks contains firms with the highest risk-adjusted
returns relative to the S&P 500. The basket has the same implied vol as median S&P 500
stock, but 3.0x the expected return (18% vs. 6%). The average stock in the basket trades at
an NTM P/E of 13.1x vs. 16.6x for the S&P 500 average. The basket returned 26.6% in 2010
compared with 15.1% for the S&P 500 and the return per unit of vol was 1.3 and ranked
near the top of a universe of 200 large-cap core mutual funds and above the S&P 500 (0.8).
5. Dividend Growth (GSTHDIVG)
Note: The ability to trade these
Our Dividend Growth basket consists of 50 stocks that have a high 2012 cash-return-
baskets will depend upon on-cash-invested and strong dividend growth. This strategy should outperform given
market conditions, including
the scarcity of yield in the current capital markets. Our basket is expected to yield 3.2% in
liquidity and borrow constraints
at the time of trade. 2012 with 22% CAGR dividend growth in 2011-2012 versus 1.8% and 9% for the S&P 500.
Goldman Sachs Global Economics, Commodities and Strategy Research 4
January 7, 2011 United States
Exhibit 4: GS recommended sector weightings Exhibit 5: S&P 500 Cyclicals vs. Defensives
pricing as of December 31, 2010 as of December 31, 2010
Sector Weightings
115
Total Goldman Sachs Current GS CYCLICALS
Return Recommended S&P 500 Overweight / Outperforming Relative Performance
Sectors 2010 Sector Weightings Weight Underweight Long GSSBCYCL /
110 Baskets Initiated Short GSSBDEFS
Energy 20 % 12 % 200 bp
(April 26, 2010)
Financials 12 Overweight 16 200
Information Technology 10 19 200
105
Consumer Discretionary 28 11 0
Industrials 27 11 0
Neutral
Materials 22 4 0
100
Telecom Services 19 3 0
Utilities 5 3 (100) DEFENSIVES
Underweight Outperforming
Consumer Staples 14 11 (200) 95
Mar-10
Dec-09
Sep-10
Oct-10
Dec-10
Nov-10
Jan-10
Apr-10
Jan-11
Feb-10
May-10
Jun-10
Jul-10
Aug-10
Health Care 3 11 (300)
S&P 500 15 % 100 % 0 bp
Source: FactSet and Goldman Sachs Global ECS Research.
Source: FactSet and Goldman Sachs Global ECS Research.
Exhibit 6: High ROE Growth basket vs. S&P 500 Exhibit 7: Dual Beta basket vs. S&P 500
as of December 31, 2010 as of December 31, 2010
108 116
106 Relative Performance
Relative Performance 112 Long GSTHBETA /
Long GSTHGROE / Short SPX
104 Short SPX
108
102
104
100
100
98
96
96
Sep-10
Jan-10
Apr-10
Nov-10
Jan-11
Jul-10
Feb-10
Mar-10
May-10
Jun-10
Aug-10
Dec-09
Oct-10
Dec-10
Jul-10
Feb-10
Mar-10
May-10
Jun-10
Aug-10
Dec-09
Sep-10
Oct-10
Dec-10
Jan-10
Apr-10
Nov-10
Jan-11
Performance represents back-test based on GS estimates before 1-Dec-10. Historical performance of current basket constituents shown before 1-Dec-10.
Source: FactSet, GS Research estimates and GS Global ECS Research. Source: FactSet and Goldman Sachs Global ECS Research.
Exhibit 8: Dividend growth basket vs. S&P 500 Exhibit 9: High Sharpe Ratio basket vs. S&P 500
as of December 31, 2010 as of December 31, 2010
120 120
115 115
110 110
105 105
100 100
Relative Performance Relative Performance
95 Long GSTHDIVG / 95 Long GSTHSHRP /
Short SPX Short SPX
90 90
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-09
Oct-10
Dec-10
Apr-10
Jun-07
Jun-08
Jun-09
Jun-10
Feb-10
Jun-10
Aug-10
Feb-11
Source: FactSet and Goldman Sachs Global ECS Research. Source: FactSet and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 5
January 7, 2011 United States
US economic recovery to continue in 2011 and 2012
US economic recovery prospects improved following the December 2010 compromise
between Congress and the White House to extend the existing tax regime. In addition
to extending the 2001/2003 tax cuts for two years and emergency unemployment benefits
through the end of 2011 the agreement also reduced payroll taxes for 2011. Our economics
research colleagues subsequently boosted their US real GDP growth forecasts by 70 bp to
3.4% in 2011 and by 20 bp to 3.8% in 2012. Goldman Sachs US Economics forecasts now
stand significantly above consensus for both years (see Exhibits 10-13).
The US economic recovery is palpable on many levels. The ISM manufacturing survey
just posted its 17th consecutive month of expansion with a reading of 57.0. Initial
unemployment claims dropped below 400,000 in the end of December for the first time
since July 2008. Private payrolls are rising, albeit not strongly enough to reduce the
unemployment rate that has hovered between 9.5% and 10% since mid-2009. The savings
rate has stopped increasing and appears to have stabilized around 6%. Our US economics
research colleagues forecast personal consumption expenditures (PCE) – which account for
roughly 70% of the US economy – will increase by 3.5% in 2011 (see Exhibits 14-19).
Exhibit 10: Goldman Sachs quarterly US GDP forecasts Exhibit 11: Goldman Sachs US Economics forecast
as of January 5, 2011 as of January 5, 2011
5.0 %
% Annual Change
Goldman Sachs 2010E 2011E 2012E
4.5 %
Economics Real GDP 2.8% 3.4% 3.8%
GDP Growth (qoq annualized %)
4.0 % Consumer Spending 1.7 3.5 3.5
3.5 % Total Fixed Investment 3.6 6.2 10.0
Consensus
3.0 % Business Fixed Investment 5.3 6.4 8.7
2.5 % Residential Investment (2.9) 5.1 15.5
Federal Government Spending 5.0 3.7 2.5
2.0 % 4.0 4.0 4.0 4.0
3.7 3.5 3.5 3.5 3.5 Exports of Goods and Services 11.5 5.8 7.8
1.5 % 3.0
2.6 Imports of Goods and Services 13.5 6.0 9.2
1.0 % Core CPI 1.0 0.7 0.5
1.7
0.5 % Unemployment Rate 9.7 9.3 8.5
0.0 % Fed Funds Rate 0.2 0.2 0.2
Q1A Q2A Q3A Q4E Q1E Q2E Q3E Q4E Q1E Q2E Q3E Q4E 2-year Treasury Rate 0.7 1.0 2.0
10-year Treasury Rate 2.8 3.8 4.3
2010 2011 2012
Source: Bloomberg and Goldman Sachs Global ECS Research. Source: Goldman Sachs Global ECS Research.
Exhibit 12: Distribution of 2011 US GDP forecasts Exhibit 13: Distribution of 2012 US GDP forecasts
consensus estimates as of December 10, 2010 consensus estimates as of January 3, 2011
10 10
2011 US GDP Forecasts 2012 US GDP Forecasts
Consensus n=51 n=63
2.6% Consensus
8 8 3.1%
Number of Forecasts
Number of Forecasts
6 6
Goldman
Sachs
3.8%
4 4
Goldman
2 Sachs 2
3.4%
0 0
1.7 2.2 2.7 3.2 3.7 1.5 2.0 2.5 3.0 3.5 4.0 4.5
2011 GDP Growth (%) 2012 GDP Growth (%)
Source: Blue Chip Economic Indicators and GS Global ECS Research. Source: Bloomberg and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 6
January 7, 2011 United States
Exhibit 14: Personal consumption expenditures rebound Exhibit 15: Personal saving rate hovers near 6%
as of January 5, 2011 as of January 5, 2011
8 14
GS 12%
12
6 Forecast US Personal Saving Rate
Year/Year Growth (%)
10
Personal Saving Rate (%)
4
8
2 6%
6
0
4
(2)
Personal Consumption Expenditures (PCE)
(70% of 2011E Real GDP) 2
1%
(4) 0
Dec-80
Dec-83
Dec-86
Dec-89
Dec-92
Dec-95
Dec-98
Dec-01
Dec-04
Dec-07
Dec-10
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
Source: BEA and Goldman Sachs Global ECS Research. Source: BEA and Goldman Sachs Global ECS Research.
Exhibit 16: Initial jobless claims trending down Exhibit 17: Private payrolls have continued to recover
as of January 6, 2011 as of January 5, 2011
700.00 500
650.00
March 2009 Peak: Private Payrolls +1.2 Million
Change in Private Payrolls (Thousands)
643,000 300 Cumulative
Initial Jobless Claims (Thousands)
600.00
Initial Jobless Claims 100
550.00
(4-Week Moving Average)
500.00 (100)
450.00
(300)
400.00
411,000
350.00 (500) -8.5 Million
2001-2007 Cumulative
300.00 Average: 360,000 (700)
250.00
(900)
200.00
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: Department of Labor and Goldman Sachs Global ECS Research. Source: Bureau of Labor Statistics and Goldman Sachs Global ECS Research.
Exhibit 18: ISM above 50 for 17 consecutive months Exhibit 19: Bank loan growth turning positive
as of January 5, 2011 as of January 5, 2011
100 90 25
ISM momentum
C&I Loans (Year/Year Growth, %)
20
75 (yoy change, lhs) 80
15
C&I Loan Growth
US ISM yoy change
50 70 10
US ISM level
5
25 60
0
(5)
0 50
(10)
(25) ISM level, rhs 40 (15)
(20)
(50) 30
Jul-07
Jul-08
Jul-09
Jul-10
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Apr-08
Oct-08
Apr-09
Oct-09
Apr-10
Oct-10
Jul-08
Jul-09
Jul-10
Jan-08
Jan-09
Jan-10
Jan-11
Source: ISM and Goldman Sachs Global ECS Research. Source: Federal Reserve and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 7
January 7, 2011 United States
The improving set of macroeconomic data releases support the view that the US
expansion is continuing. However, many investors question the durability of the recovery.
Although few equity market participants we meet believe a “double-dip” is likely, investor
concerns exist regarding how long the expansion may last and the ultimate magnitude of
the recovery.
If the Goldman Sachs Economics 2011 and 2012 GDP forecasts materialize, then by
year-end 2012 the US economy will have expanded for 42 months, much shorter than
the length of the median expansion (52 months) and the average expansion (61 months)
during the 10 economic cycles since 1949. Despite our forecast that the recovery will
continue for at least two more years, by the end of 2012 the real size of the US economy is
only projected to be 12% greater than at its trough in June 2009, making it one of the
weakest expansions of the past 60 years. Both the average and median change in real GDP
during past expansions equal about 25% or 2x the prospective economic growth from the
recent trough through year-end 2012. The weakness of the current rebound is also notable
because it follows the unusually long and deep 2008-09 recession (see Exhibit 20).
Investor concerns about the sustainability of the current expansion reflect the
“jobless recovery” nature of the rebound, echoing the patterns of 1991 and 2001.
Exhibit 21 clearly illustrates this point. The unemployment rate remains near 10% and
Goldman Sachs Economics forecasts it will fall to just 8.5% by year-end 2012. Core inflation
should remain subdued for the next two years. The output gap remains large and should
limit pricing power of most firms while capacity utilization (75%) remains below its long-
term average of 81%. We expect Fed Funds will remain unchanged for an extended period.
Goldman Sachs Economics forecasts the ten-year US Treasury yield will rise to 3.75%
at the end of 2011 and 4.25% at the end of 2012. Combined with our inflation forecasts
those levels equate to real bond yields in a 2.25% - 3.75% range relative to headline and
core inflation for each of the next two years.
Exhibit 20: Economic expansions and contractions and lead time to market peaks/troughs
Peaks and troughs of economy and S&P 500
Expansion Contraction
Peak to
Trough Change Lead Time Next Change Lead Time
to Peak in Real of Market Trough in Real of Market
Trough Peak (Months) GDP Peak (Months) GDP Trough
Oct 1949 Jul 1953 45 28% (10) 10 (2)% 8
May 1954 Aug 1957 39 13 12 8 (3) 5
Apr 1958 Apr 1960 24 12 (10) 10 (0) 3
Feb 1961 Dec 1969 106 51 12 11 0 5
Nov 1970 Nov 1973 36 17 10 16 (4) 5
Mar 1975 Jan 1980 58 26 (1) 6 (4) 3
Jul 1980 Jul 1981 12 5 7 16 (3) 3
Nov 1982 Jul 1990 92 38 (8) 8 (2) 5
Mar 1991 Mar 2001 120 42 11 8 0 (11)
Nov 2001 Dec 2007 73 19 2 18 (5) 3
Median 52 23% 4 10 (3)% 4
Average 61 25 2 11 (2) 3
Jun 2009 to Present 18 7
Jun 2009 to Dec 2012 42 12
Source: NBER, BEA, FactSet, Stock and Watson, and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 8
January 7, 2011 United States
Exhibit 21: Current cycle tracking jobless recoveries of past two recessions
as of January 5, 2011
12 12
11 Recoveries: 1954 - 1982 Nonfarm 11
Employment
Change from end of reccesion (pct pts)
10 1991 10
9 9
2001
8 8
2009 Current Cycle
7 7
6 6
5 Last Fed Cut 5
First Fed
4 Current Cycle 4
Raise
3 Last Fed Cut 3
2 2
1 1
0 0
(1) (1)
(2) (2)
-12 -8 -4 0 +4 +8 +12 +16 +20 +24 +28 +32 +36
Months from End of Recession
Source: Federal Reserve, Department of Labor, and Goldman Sachs Global ECS Research.
Two economic concerns with potential market impact relate to budget issues at the
state and local as well as federal levels. Fiscal imbalances at the state and local level
mean significant budget cuts are likely. State and local spending account for 11% of
expected 2011 US GDP (see Exhibit 22).
In terms of the Federal budget impact on the equity market, volatility may rise in the
spring as federal borrowing approaches the current debt ceiling of $14.3 trillion.
Outstanding federal debt currently totals $14.0 trillion. New rules adopted under Speaker
John Boehner require a vote to raise the federal debt ceiling that is separate from any
budgetary votes. The “tea party” wing of the Republican majority is likely to make lifting
the federal debt ceiling a major issue. Volatility jumped in late 1995 when Congress and
President Clinton could not agree on a budget and government temporarily shut down.
Exhibit 22: Federal, state, and local government spending Exhibit 23: Federal debt nears the debt ceiling
as of January 5, 2011 as of January 5, 2011
12 15
Federal Government Expenditures Federal Debt Ceiling = $14.3 tn
GS
10 (8% of 2011E Real GDP) Forecast 14
8
Year/Year Growth (%)
13
Federal Debt ($ Tn)
6
Current Public Debt
4 = $14.0 tn
12
2
11
0
(2) 10 Outstanding US Public Debt
(4) State and Local Government Expenditures
(11% of 2011E Real GDP) 9
(6)
Jan-90
Jan-92
Jan-94
Jan-96
Jan-98
Jan-00
Jan-02
Jan-04
Jan-06
Jan-08
Jan-10
Jan-12
Jan-14
8
1-Jan-08
1-Jul-08
1-Jan-09
1-Jul-09
1-Jan-10
1-Jul-10
1-Jan-11
1-Jul-11
Source: BEA and Goldman Sachs Global ECS Research. Source: US Treasury and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 9
January 7, 2011 United States
S&P 500 earnings will reach a new high in 2011 at $96
We raise our 2011 S&P 500 earnings estimate to $96 (from $94) and 2012 estimate to
$106 (from $104). These changes are consistent with our earnings sensitivity matrix
published in our 2011 Outlook: Easy money, hard market (December 1, 2010).
Our regression-based model of sales and net margins for each sector drives our
earnings forecasts for individual sectors and for the overall S&P 500. Variables
included in our sales and margin models encompass US GDP, world GDP, 2-year and 10-
year Treasury rates, oil, inflation, and the trade-weighted Dollar.
The level of sales is highly correlated with economic growth. Goldman Sachs
Economics forecasts that by year-end 2011 nominal GDP will equal 107% of the previous
peak reached in 3Q 2008. Our model projects that S&P 500 sales (ex-Financials and Utilities)
in 2011 will be 96% of the previous peak reached in 3Q 2008. We forecast crude oil will
average $100 per barrel in 2011, 30% below the peak level of $147/barrel in summer 2008.
By year-end 2012 the nominal size of the US economy will reach $16 trillion, 112% of prior
peak and sales for the S&P 500 will be 103% of prior peak (see Exhibit 24).
Exhibit 24: Level of S&P 500 Sales and US Nominal GDP Exhibit 25: S&P 500 net profit margins
realized date as of January 3, 2011 as of January 3, 2011
$1,000 $17
4Q 2012 11%
112% of prior
Trailing Sales per Share (ex-Financials and Utilities)
peak GDP Bottom-up Consensus 2012
$16
Sales Peak 10% S&P 500 Net Profit Margin Forecast 9.6
$900 3Q 2008
Nominal GDP Peak $15 9% 9.0
3Q 2008
US Nominal GDP ($Tr)
$800
4Q 2012 $14 8% 8.3
103% of prior
peak sales
US Nominal GDP $13 7%
(RHS)
$700 Sales Trough 6% 5.9
4Q 2009 $12
5% Goldman Sachs
$11
Portfolio Strategy
$600 S&P 500 Sales per Share 4.7
4% Forecast
ex-Financials and Utilities 4.1
$10
(LHS)
3%
Dec-79
Dec-84
Dec-89
Dec-94
Dec-99
Dec-04
Dec-09
Dec-14
$500 $9
Dec-99
Dec-00
Dec-01
Dec-02
Dec-03
Dec-04
Dec-05
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Dec-11
Dec-12
Dec-13
Source: BEA via Haver, Compustat and Goldman Sachs Global ECS Research. Source: Compustat, First Call, I/B/E/S, and GS Global ECS Research.
Exhibit 26: S&P 500 sales, earnings, and margins, as of January 3, 2011
Top-down Bottom-Up
GS Forecast Consensus
2010E 2011E 2012E 2010E 2011E 2012E
S&P 500 ex-Financials and Utilities
Sales Per Share $783 $846 $907 $780 $831 $881
Y/Y growth 6.1% 8.1% 7.2% 5.6% 6.6% 6.0%
Profit Margin 8.5% 8.8% 9.0% 8.5% 9.0% 9.6%
EPS $66 $75 $81 $66 $75 $84
Y/Y growth 32.0% 12.6% 8.7% 31.4% 13.6% 12.4%
Utilities EPS $3 $3 $3 $3 $3 $3
Financials EPS 14 18 21 14 17 21
S&P 500 EPS $84 $96 $106 $84 $96 $108
Y/Y growth 47.5% 14.5% 10.5% 46.9% 14.7% 13.0%
Source: Compustat, First Call, I/B/E/S, and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 10
January 7, 2011 United States
Margins are a key reason earnings have rebounded so quickly. Net margins for the S&P
500 (ex-Financials and Utilities) troughed at 4.1% during the recession of 1990, bottomed at
4.7% in 2002, but hit a low of just 5.9% in 2009. We forecast that by 2011 net margins will
have reached 105% of previous peak while consensus forecasts 109% (see Exhibit 25).
Domestic GDP growth is the most important input in our earnings model. Exhibit 27
shows the sensitivity of our EPS model to various US GDP growth rate assumptions.
For example, our base case growth rate in 2011 equals 3.4%. However, a 50 bp shift in 2011
GDP growth translates into a $2 per share swing in EPS (see Exhibit 27). The sensitivity of
our 2012 EPS estimates to various GDP growth rate assumptions is similar. As discussed
previously, Goldman Sachs Economics has US GDP forecasts above consensus for both
2011 (3.4% vs. 2.6%) and 2012 (3.8% vs. 3.1%).
Another key variable in our EPS model is net profit margin. Exhibit 28 shows the
sensitivity of our 2011 and 2012 EPS forecasts to various margin assumptions. For example,
our 2011 EPS estimate of $96 per share corresponds with an 8.8% net margin. A 50 bp
swing in 2011 margins represents roughly $4 per share in EPS. The sensitivity of our 2012
EPS estimates to shifts in margins is of a similar magnitude.
Exhibit 27: Sensitivity of EPS estimates to GDP growth forecasts
as of January 3, 2011
Sensitivity of 2011 EPS forecast to Sensitivity of 2012 EPS forecast to
US GDP growth US GDP growth
2011 2011 EPS 2012 US GDP
US GDP Level Growth
2.8 % 3.3 % 3.8 % 4.3 % 4.8 %
96% 14% (1)% (1)% 0% 1% 1%
4.9 % 102 22 % 4.9 % 104 106 109 112 114
2011 US GDP
4.4 100 20 4.4 103 106 108 111 113
3.9 98 17 3.9 102 105 107 110 112
Base Case: 3.4 96 14 3.4 101 104 106 109 111
2.9 94 12 105
2.9 100 103 107 110
2.4 92 9
2.4 99 102 104 106 109
1.9 90 7
1.9 98 100 103 105 107
Source: Goldman Sachs Global ECS Research.
Exhibit 28: Sensitivity of EPS estimates to sales growth and margins
as of January 3, 2011
Sensitivity of 2011 EPS forecast to Sensitivity of 2012 EPS forecast to
sales growth and margin sales growth and margin
2011 Profit Margin 2012 Profit Margin
7.8 % 8.3 % 8.8 % 9.3 % 9.8 % 8.0 % 8.5 % 9.0 % 9.5 % 10.0 %
10.1 % 89 93 97 102 106 9.2 % 98 103 108 112 117
2011 Sales Growth
2012 Sales Growth
9.1 88 92 97 101 105 8.2 98 102 107 111 116
8.1 88 92 96 100 104 7.2 97 102 106 111 115
7.1 87 91 95 100 104 6.2 96 101 105 110 114
6.1 86 90 95 99 103 5.2 96 100 105 109 113
Source: Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 11
January 7, 2011 United States
Exhibit 29 compares the results of our top-down sector-level sales, margin, and
earnings models with the bottom-up consensus estimates. Exhibit 30 shows the
historical contribution to net income by sector since 1974.
Exhibit 29: Decomposition of S&P 500 earnings estimates
as of January 3, 2011
Contribution to EPS Annual earnings growth rates
GS Top-Down EPS Bottom-up GS Top-Down Bottom-Up
2010E 2011E 2012E 2010 2011E 2012E 2011E 2012E 2011E 2012E
Information Technology $15 $17 $20 $15 $17 $19 12 % 14 % 16 % 11 %
Energy 10 13 14 10 12 14 24 10 14 19
Health Care 11 12 13 11 12 13 11 6 13 6
Consumer Staples 9 9 10 9 9 10 7 6 9 10
Industrials 8 9 10 8 9 11 12 12 16 17
Consumer Discretionary 8 9 9 8 9 10 6 5 11 14
Utilities 3 3 3 3 3 3 (1) (1) (2) (2)
Materials 3 3 3 3 3 4 15 5 27 14
Telecom Services 2 3 3 2 2 3 14 (0) 9 14
S&P 500 ex-Financials 70 78 85 69 78 88 12 8 13 12
Financials 14 18 21 14 17 21 27 20 24 18
S&P 500 Operating EPS $84 $96 $106 $84 $96 $108 14 % 11 % 15 % 13 %
Note: Numbers may not add due to rounding.
Source: First Call, Compustat, and Goldman Sachs Global ECS Research.
Exhibit 30: Net Income contribution by sector to S&P 500, 1974-2010 (a)
as of December 31, 2010
100%
Financials 15%
90% Financials
Bubble
80% 31% Health Care 12%
70%
Info Tech 19%
Tech
60% Bubble
16%
50% Consumer Staples 12%
40%
Consumer Discretionary 10%
30%
Industrials 10%
20% Telecom Services 3%
Energy Utilities 4%
Bubble Materials 3%
10% 26%
Energy 12%
0%
Dec-74
Dec-77
Dec-80
Dec-83
Dec-86
Dec-89
Dec-92
Dec-95
Dec-98
Dec-01
Dec-04
Dec-07
Dec-10
(a) Net Income defined as earnings before extraordinary items available to common shareholders. Only positive data points are included.
Source: Compustat and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 12
January 7, 2011 United States
Increasing our 3-, 6-, and 12-month S&P 500 price targets
We have increased our year-end 2011 S&P 500 price target to 1500 (from 1450)
representing a potential price return of 19%. Our price target revision stems almost
entirely from our higher earnings estimate. We still expect a year-end 2011 P/E multiple of
roughly 14x based on our 2012 EPS forecast of $106. Our 19% return is split evenly
between earnings growth and multiple expansion.
Higher real interest rates provide upside risk to valuation multiples. Forward P/E
multiples have shifted considerably over time, ranging from 5x to 25x over the past 35
years. The P/E multiple may be considered a crude DCF or DDM model because it implicitly
reflects some assumption regarding future growth discounted at an appropriate rate.
Accordingly, we find P/E multiples vary considerably depending on inflation and interest
rates (see Exhibits 31 and 32). Goldman Sachs Economics forecasts ten-year US Treasury
yield will rise to 3.75% at the end of 2011 and an additional 50 bp to 4.25% at the end of
2012. However, we expect inflation to remain low implying a modest shift higher in real
interest rates that historically has been supportive of higher P/E multiple valuation (see
Exhibits 31-32).
We also raise our 3-month S&P 500 target to 1325 from 1250 and our 6-month price
target to 1400 from 1325. Our interim forecasts reflect our view of the likely path toward
our 12-month DDM-based estimate of fair value. Our framework for short-term price
targets relies heavily on conditional return distributions and options-implied returns. A 3-
month return of 5% would rank in the 62nd percentile of 3-month returns since 1950,
conditional on a trailing 1-month return in the +5% to +10% range that we have just
experienced. These approaches assign a 30-40% likelihood that the S&P 500 will reach our
3-month price target.
Exhibit 31: Average S&P 500 NTM P/E by Inflation Bands Exhibit 32: Avg S&P 500 NTM P/E by Real 10 Yr Bands
as of January 3, 2011 as of January 3, 2011
20x 20x
Average S&P 500 Forward P/E by Average S&P 500 Forward P/E by
17.2x Core CPI Bands, 1976-2010 Real 10 Yr Rate Bands, 1976-2010
16.4x 16.3x
16x 16x 14.9x
13.7x
Average NTM P/E
12.7x
Average NTM P/E
12.1x 12.4x
12x 12x
10.2x
9.1x
8.2x 8.3x
8x 7.5x 7.7x 7.6x 7.3x
6.7x 8x
6.2x 6.4x
21 43 145 48 72 24 28 5 8 37
4x mo 4x 37 64 108 98 59 15 17 11 6
mo
0x 0x
1% & 1% to 2% to 3% to 4% to 5% to 6% to 7% to 8% to 9% &
1% & 1% to 2% to 3% to 4% to 5% to 6% to 7% to 8% to
below 2% 3% 4% 5% 6% 7% 8% 9% above
below 2% 3% 4% 5% 6% 7% 8% 9%
Core CPI Band
US Ten Year Yield minus Core CPI Band
Source: Haver Analytics, I/B/E/S, FactSet, and GS Global ECS Research. Source: Haver Analytics, I/B/E/S, FactSet, and GS Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 13
January 7, 2011 United States
Dividend Discount Model, Cost of Equity and Equity Risk Premium
Our year-end 2011 target of 1500 reflects the future value of our DDM and a potential return
of 19% over the year. In our DDM, two input adjustments cause the 50 point valuation
increase from our previous 12-month target of 1450:
1. Our future cash flow expectations increased as a result of higher S&P 500 earnings
estimates; and
2. We expect a larger decline in the cost of equity by year-end 2011. The cost of
equity declines when investors are more willing to carry risk, and stronger
economic growth in 2011 should reduce macro concerns currently priced into the
market.
We divide the cost of equity into two parts: risk-free return and equity risk premium
(ERP). We use the return on 10-year US government bonds as a proxy for the risk-free rate.
The cost of equity spikes during times of uncertainty when investors are less willing to
carry risk and recedes when the economic and financial environment is more stable.
Exhibit 33: 3-month, 6-month and 12-month (year-end 2011) fair value estimate of S&P 500
31-Dec-10 3 Month 6 Month 12 Month
Assumptions
Assumed long-term EPS growth rate
Real growth rate 2.5% 2.5% 2.5% 2.5%
Nominal growth rate 2.1 2.1 2.1 2.0
10 year US Treasury 3.3 3.3 3.5 3.8
Equity risk premium 5.0 4.9 4.5 4.1
Cost of Equity (risk free rate + ERP) 8.3% 8.2% 8.0% 7.8%
Calculation of DCF value
Terminal year multiple 16.2 x 16.5 x 16.9 x 17.3 x
PV of terminal year value 874 930 993 1072
PV of dividends years 1-20 384 395 407 428
PV of terminal year value + PV of dividends 1258 1325 1400 1500
S&P 500 DDM Fair Value 1325 1400 1500
Current S&P 500 Price 1258
Premium / (Discount) to Current 5% 11% 19%
Source: Goldman Sachs Global ECS Research.
Exhibit 34: S&P 500 cost of equity = ERP + 10-year Treasury yield
as of January 3, 2011
18
2011 Year-end Forward P/E
16 Forecast
2011 Year-end Forward Cost of Equity
14 14 7.5 % 7.6 % 7.7 % 7.8 % 7.9 % 8.0 % 8.1 %
1.4 % 13.3 12.9 12.6 12.2 11.9 11.6 11.3
12
1.5 13.6 13.2 12.9 12.5 12.2 11.9 11.6
Long-term core inflation
10 1.6 13.9 13.5 13.2 12.8 12.5 12.2 11.9
1.7 14.3 13.9 13.5 13.1 12.8 12.4 12.1
Cost of
8 1.8 14.6 14.2 13.8 13.5 13.1 12.7 12.4
Equity
1.9 15.0 14.6 14.2 13.8 13.4 13.1 12.7
6 ERP 2.0 15.4 15.0 14.5 14.1 13.7 13.4 13.0
4 2.1 15.8 15.4 14.9 14.5 14.1 13.7 13.3
10 Year 2.2 16.2 15.8 15.3 14.9 14.5 14.0 13.7
2 US Treasury 2.3 16.7 16.2 15.7 15.3 14.8 14.4 14.0
Yield
2.4 17.2 16.6 16.1 15.7 15.2 14.8 14.4
0
2.5 17.7 17.1 16.6 16.1 15.6 15.2 14.7
Dec-81
Dec-86
Dec-91
Dec-96
Dec-01
Dec-06
Dec-11
Dec-16
2.6 18.2 17.6 17.1 16.5 16.0 15.6 15.1
Note: We estimate the equity risk premium (ERP) using our DDM framework to model expected future cash flows. We solve for the cost of equity that implies the
market is at ‘fair value’ and then deduct the 10-year US Treasury.
Source: IDC via FactSet and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 14
January 7, 2011 United States
Our best investment ideas for 2011: 1. Cyclicals vs. Defensives
We created two baskets – Cyclicals and Defensives – by sorting 24 S&P 500 industry
groups on the basis of their respective betas to the Wavefront US Growth basket.
These betas serve as a measure of the relative economic cyclicality for each industry group.
The stocks within each industry group with a beta greater than that of the S&P 500
comprise the Cyclical Basket <GSSBCYCL>. Stocks within the industry groups with betas
less than that of the S&P 500 comprise the Defensive Basket <GSSBDEFS>. These two
baskets collectively account for 100% of the S&P 500 market capitalization.
The S&P 500 industry groups provide greater granularity and precision in identifying
cyclical and non-US exposures compared with the 10 S&P 500 sectors. We constructed
our sector baskets on the basis of the 24 S&P 500 industry groups in order to differentiate
within sectors that are often varied in composition. In some instances, all parts of a
particular sector are contained within a given sector basket. For example, the Energy and
Materials sectors are entirely contained within the Cyclicals basket. Other sectors, such as
Information Technology and Consumer Discretionary, are broken up across baskets. In
almost every instance, our industry group classifications are consistent with the economic
sensitivities in our Wavefront models.
Exhibit 35: S&P 500 industry group international exposure, cyclicality and performance (market-cap weighted);
as of January 5, 2011
Selection Criteria
Non-U.S. Beta to Beta to Weight in 2010 Sales growth P/E
Industry Group Sector Sales WF Growth S&P 500 S&P 500 Return 2011 2012 NTM
All Cyclicals <GSSBCYCL> 39 % 1.2 1.2 57 % 20 % 10 % 7% 13.8x
Global Cyclicals <GSSBGCYC>
Automobiles & Components Consumer Discretionary 55 % 1.7 1.5 1% 53 % 7% (0)% 10.5x
Materials Materials 48 1.4 1.4 4 22 6 6 15.5
Semis & Semi Equipment Information Technology 82 1.1 1.2 2 11 5 5 12.4
Capital Goods Industrials 42 1.1 1.1 8 27 6 7 15.5
Energy Energy 46 1.1 1.2 12 20 17 9 13.4
Consumer Durables & Apparel Consumer Discretionary 43 1.0 1.1 1 31 6 8 16.9
Tech Hardware & Equip Information Technology 58 0.8 1.1 7 12 8 7 14.1
Global Cyclicals Total 48 % 1.1 1.2 36 % 22 % 10 7 14.1
Domestic Cyclicals <GSSBDCYC>
Real Estate Financials 7% 1.8 1.4 2% 32 % NM NM 18.9x
Banks Financials 0 1.8 1.2 3 20 NM NM 14.5
Diversified Financials Financials 29 1.5 1.4 8 5 NM NM 11.8
Insurance Financials 25 1.3 1.1 4 16 NM NM 11.7
Transportation Industrials 18 1.1 1.1 2 32 9 7 17.0
Media Consumer Discretionary 22 1.0 1.1 3 23 5 5 14.9
Domestic Cyclicals Total 22 % 1.4 1.3 22 % 16 % 6 6 13.3
All Defensives <GSSBDEFS> 20 % 0.4 0.8 43 % 11 % 5% 4% 13.9x
Global Defensives <GSSBGDEF>
Software & Services Information Technology 42 % 0.7 0.9 9% 7% 8% 7% 14.7x
Consumer Services Consumer Discretionary 37 0.6 0.9 2 29 5 6 17.2
Household & Personal Products Consumer Staples 61 0.3 0.5 2 8 4 5 15.6
Food, Beverage & Tobacco Consumer Staples 40 0.3 0.6 6 19 7 4 14.4
Pharm, Biotech & Life Sciences Health Care 48 0.2 0.7 7 2 3 (0) 10.9
Global Defensives Total 45 % 0.4 0.7 26 % 9% 6 4 13.5
Domestic Defensives <GSSBDDEF>
Commercial & Professional Srvcs Industrials 20 % 0.7 0.9 1% 12 % 5% 5% 16.1x
Retailing Consumer Discretionary 12 0.7 0.9 4 25 6 6 17.2
Utilities Utilities 5 0.4 0.8 3 5 NM NM 12.7
Telecom Services Telecom Services 3 0.4 0.9 3 19 2 2 17.1
Health Care Equipment & Services Health Care 6 0.3 0.9 4 4 4 4 13.0
Food & Staples Retailing Consumer Staples 15 0.2 0.6 2 9 5 5 13.7
Domestic Defensives Total 10 % 0.4 0.8 17 % 12 % 5 4 14.6
S&P 500 30 % 0.8 1.0 100 % 15 % 7% 6% 13.8x
Source: FactSet, Compustat, Company 10-K filings, and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 15
January 7, 2011 United States
GSSBCYCL – Cyclicals Basket
Exhibit 36: Stocks that are leveraged to US growth (Bloomberg ticker: <GSSBCYCL>)
We recommend investors BUY our Cyclicals basket and SELL our Defensives basket. The Cyclicals basket was introduced
in April 2010 and contains all S&P industry groups with a beta to the Wavefront US Growth basket <GSWBGDPA> higher
than the S&P 500’s beta to the Wavefront US Growth basket. Fifteen of the 24 industry groups, spanning seven of the ten
S&P sectors, are included in the Cyclicals basket with a weighted-average beta of 1.2 to the Wavefront US Growth basket
(S&P 500 beta to Wavefront US Growth is 0.8).
See our US Sector Views: Overweight Global Cyclicals; Underweight Domestic Defensives report (April 26, 2010).
Modeled Relative performance Constituent attributes
106 x Key Criteria: Industry groups with a beta to the
Wavefront US Growth basket higher than the S&P
500’s beta to the Wavefront US Growth basket.
104
x Growth: In aggregate, the basket is expected to grow
sales 10% and earnings 17% in 2011 vs. 7% and 15%
102
for the S&P 500 aggregate.
Relative Performance
x Valuation: The P/E of the basket trades in-line with
100
Long GSSBCYCL /
Short SPX the S&P 500 (13.8x vs. 13.8x).
x Sector Exposure: Largest sectors include Financials
98 (26%) and Energy (21%).
Mar-10
Dec-09
Sep-10
Oct-10
Dec-10
Nov-10
Jan-10
Apr-10
Jan-11
Feb-10
May-10
Jun-10
Jul-10
Aug-10
Feb-11
x Performance: +4.0% since inception vs. +4.8% for the
S&P 500.
Source: FactSet and Goldman Sachs Global ECS Research.
Exhibit 37: Cyclical Basket Composition <GSSBCYCL>
as of December 31, 2010
CYCLICALS Basket Composition <GSSBCYCL>
By Sector By Industry Group
Cons Durables Autos &
Materials Health Care & Apparel Components
0% Real Estate 2% Pharm, Biotech
Consumer 6% Software & 2%
3% & Life Sciences
Discretionary Services
Financials 0%
9% 3%
26% Transportation Energy
4% 21%
Semis & Semi
Equpmt
4%
Industrials Banks
18% 5%
Media
6% Capital Goods
14%
Materials
6%
Energy
21%
Insurance
Info Tech
6% Tech HW &
20%
Diversified Equpmt
Financials 13%
11%
Source: Compustat, FactSet, and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 16
January 7, 2011 United States
GSSBDEFS – Defensives Basket
Exhibit 38: Stocks that are less sensitive to US Growth (Bloomberg ticker: <GSSBDEFS>)
We recommend investors SELL our Defensives basket and BUY our Cyclicals basket. The Defensives basket was
introduced in April 2010 and contains all S&P industry groups with a beta to the Wavefront US Growth basket
<GSWBGDPA> lower than the S&P 500’s beta to the Wavefront US Growth basket. Thirteen of the 24 industry groups,
spanning nine of the ten S&P sectors, are included in the Defensives basket with a weighted-average beta of 0.4 to the
Wavefront US Growth basket (S&P 500 beta to Wavefront US Growth is 0.8).
See our US Sector Views: Overweight Global Cyclicals; Underweight Domestic Defensives report (April 26, 2010).
Modeled Relative performance Constituent attributes
102 x Key Criteria: Industry groups with a beta to the
Relative Performance Wavefront US Growth basket lower than the S&P
101
Long GSSBDEFS / 500’s beta to the Wavefront US Growth basket.
100 Short SPX
x Growth: In aggregate, the basket is expected to grow
99 sales 5% and earnings 9% in 2011 vs. 7% and 15% for
98 the S&P 500 aggregate.
97
x Valuation: The P/E of the basket trades in-line with
the S&P 500 (13.9x vs. 13.8x).
96
x Sector Exposure: Largest sectors include Consumer
95 Staples (26%) and Health Care (26%).
Mar-10
Dec-09
Sep-10
Oct-10
Dec-10
Jan-10
Apr-10
Nov-10
Jan-11
Feb-10
May-10
Jun-10
Jul-10
Aug-10
Feb-11
x Performance: +5.7% since inception vs. +4.8% for the
S&P 500.
Source: FactSet and Goldman Sachs Global ECS Research.
Exhibit 39: Defensive Basket Composition <GSSBDEFS>
as of December 31, 2010
DEFENSIVES Basket Composition <GSSBDEFS>
By Sector By Industry Group
Commercial & Materials
Consumer
Prof Srvcs 0%
Industrials Materials Services Energy
2%
2% 0% Energy Household & 4% 0%
Telecom Personal
Services 0% Pharm, Biotech
Products
8% Consumer 6% & Life Sciences
18%
Utilities Staples
8% 26% Food & Staples
Retailing
6%
Telecom
Consumer Services
7% Software &
Discretionary Services
13% 17%
Utilities
8%
Health Care
Health Care Equpmt &
Info Tech Services Food, Beverage
26%
17% 9% Retailing & Tobacco
9% 14%
Source: Compustat, FactSet, and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 17
January 7, 2011 United States
Exhibit 40: Top 20 stocks in the Cyclicals Basket (Bloomberg ticker: <GSSBCYCL>)
as of December 31, 2010
Top 20 Stocks in the Cyclicals Basket <GSSBCYCL>
Basket
Company Ticker Sector Industry Group GS Rating Weight (%)
Exxon Mobil Corp. XOM Energy Energy Neutral 5.8
Apple Computer AAPL Information Technology Technology Hardware & Equipment Buy* 4.5
General Electric GE Industrials Capital Goods Buy 3.0
International Bus. Machines IBM Information Technology Software & Services Neutral 2.9
Chevron Corp. CVX Energy Energy Neutral 2.8
JPMorgan Chase & Co. JPM Financials Diversified Financials Buy* 2.6
Wells Fargo WFC Financials Banks Neutral 2.5
Bank of America Corp. BAC Financials Diversified Financials Buy 2.1
Berkshire Hathaway Inc. BRK.B Financials Insurance NC 2.0
Intel Corp. INTC Information Technology Semiconductors & Semiconductor Equipment Neutral 1.8
Cisco Systems CSCO Information Technology Technology Hardware & Equipment Neutral 1.8
Schlumberger Ltd. SLB Energy Energy Buy 1.8
ConocoPhillips COP Energy Energy Neutral 1.6
Hewlett-Packard HPQ Information Technology Technology Hardware & Equipment Sell 1.5
Citigroup Inc. C Financials Diversified Financials Buy* 1.4
QUALCOMM Inc. QCOM Information Technology Technology Hardware & Equipment Buy* 1.3
Occidental Petroleum OXY Energy Energy Buy* 1.2
United Technologies UTX Industrials Capital Goods Buy 1.1
Walt Disney Co. DIS Consumer Discretionary Media Buy 1.1
United Parcel Service UPS Industrials Transportation Buy* 1.1
Total 44.0
Asterisk denotes Conviction List
Source: Compustat, FactSet, and Goldman Sachs Global ECS Research.
Exhibit 41: Top 20 stocks in the Defensive Basket (Bloomberg ticker: <GSSBDEFS>)
as of December 31, 2010
Top 20 Stocks in the Defensives Basket <GSSBDEFS>
Basket
Company Ticker Sector Industry Group GS Rating Weight (%)
Microsoft Corp. MSFT Information Technology Software & Services Neutral 4.5
Procter & Gamble PG Consumer Staples Household & Personal Products Buy 3.9
AT & T Inc. T Telecommunication Services Telecommunication Services Buy 3.6
Johnson & Johnson JNJ Health Care Pharmaceuticals Biotechnology & Life Sciences Neutral 3.6
Coca-Cola Co. KO Consumer Staples Food Beverage & Tobacco Buy 3.2
Google Inc. GOOG Information Technology Software & Services Buy 3.0
Pfizer, Inc. PFE Health Care Pharmaceuticals Biotechnology & Life Sciences Buy 3.0
Oracle Corp. ORCL Information Technology Software & Services Buy* 2.6
Wal-Mart Stores WMT Consumer Staples Food & Staples Retailing Buy 2.4
Merck & Co. MRK Health Care Pharmaceuticals Biotechnology & Life Sciences Neutral 2.4
Philip Morris Intl PM Consumer Staples Food Beverage & Tobacco Buy 2.3
PepsiCo Inc. PEP Consumer Staples Food Beverage & Tobacco Buy 2.2
Verizon Communications VZ Telecommunication Services Telecommunication Services Neutral 2.1
McDonald's Corp. MCD Consumer Discretionary Consumer Services Neutral 1.7
Abbott Labs ABT Health Care Pharmaceuticals Biotechnology & Life Sciences Neutral 1.6
Amazon.com AMZN Consumer Discretionary Retailing Buy 1.3
Home Depot HD Consumer Discretionary Retailing Neutral 1.3
Kraft Foods KFT Consumer Staples Food Beverage & Tobacco Neutral 1.1
Amgen AMGN Health Care Pharmaceuticals Biotechnology & Life Sciences Sell 1.1
Altria Group, Inc. MO Consumer Staples Food Beverage & Tobacco Neutral 1.1
Total 47.9
Asterisk denotes Conviction List
Source: Compustat, FactSet, and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 18
January 7, 2011 United States
2. GSTHBETA – Dual Beta Basket
Exhibit 42: Stocks with highest combined beta to both US economy and US stock market (Bloomberg:<GSTHBETA>)
We recommend investors BUY our Dual Beta basket, introduced in December 2010, a sector-neutral basket containing 50
stocks with the highest combined beta to both the US economy and the US stock market. We define sensitivity to the US
economy in terms of beta to the Wavefront Growth basket <GSWBGDPA> and sensitivity to the stock market in
traditional terms as beta to the S&P 500. This “dual high beta” basket will outperform if our expectations of economic
growth and a stock market rally are realized. The dual beta basket has an average dual beta of 1.7 and the S&P 500
average has a dual beta of 1.1.
See our report 2011 US equity outlook: Easy Money, hard market (December 1, 2010) for more details.
Modeled Relative performance Constituent attributes
116 x Key Criteria: S&P 500 stocks with the highest average
beta to the index itself and the Wavefront US Growth
Relative Performance
112 Long GSTHBETA / basket <GSWBGDPA>.
Short SPX x Growth: Dual Beta basket is expected to grow 2011
108 sales by 11% and earnings by 23% on average. The
S&P 500 is expected to have lower average sales
104 growth (8%) and earnings growth (14%).
x Valuation: The average P/E of the basket trades at a
100
premium multiple of 19.1x vs. 16.6x for the S&P 500
average.
96
x Sector Exposure: Largest sectors include Info Tech
Sep-10
Jan-10
Apr-10
Nov-10
Jan-11
Jul-10
Feb-10
Mar-10
May-10
Jun-10
Aug-10
Dec-09
Oct-10
Dec-10
(20%) and Financials (17%).
x Performance: +10.9% since inception vs. +4.4% for the
S&P 500.
Source: FactSet and Goldman Sachs Global ECS Research.
Exhibit 43: Median dual beta by sector for the basket Exhibit 44: Sector composition of GSTHBETA Basket
3.0 Telecom
Utilities Services
GSTHBETA 4% 2%
Median Dual Beta by Sector Materials
2.5 4% Info Tech
20%
Consumer
Staples
9%
2.0
Dual Beta
1.5 Industrials
10%
Financials
17%
1.0
Consumer
0.5 Discretionary
Financials
Energy
Materials
Industrials
Utilities
Consumer
Services
Discretionary
Dual Beta
Info Tech
Health Care
Telecom
10%
Staples
Consumer
Basket
Health Care
Energy
12%
12%
Source: FactSet and Goldman Sachs Global ECS Research. Source: FactSet and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 19
January 7, 2011 United States
GSTHBETA: Dual Beta Basket Constituents
Exhibit 45: Dual Beta Basket Constituents (Bloomberg ticker: <GSTHBETA>)
as of December 31, 2010
2010 2010-11 2010 2010-11
Total Market NTM Earnings Dual Total Market NTM Earnings Dual
Company Name Ticker Return Cap P/E Growth Beta Company Name Ticker Return Cap P/E Growth Beta
Information Technology Consumer Staples
MEMC Electronic Materials WFR (17)% $ 2.6 11.2 NM 1.9 Whole Foods Market Inc. WFMI 84 % $ 8.7 29.6 17 % 1.0
Monster Worldwide MWW 36 3.1 NM NM 1.9 Estee Lauder EL 69 15.8 24.3 17 1.0
Teradyne Inc. TER 31 2.5 12.3 (34) 1.8 Avon Products AVP (5) 12.5 14.0 14 1.0
Jabil Circuit JBL 18 4.4 8.9 33 1.8 Supervalu Inc. SVU (22) 2.0 6.5 (3) 0.9
JDS Uniphase Corp JDSU 76 3.2 19.4 40 1.7 Constellation Brands STZ 39 4.7 12.3 8 0.8
Advanced Micro Devices AMD (15) 5.6 23.0 (9) 1.7
SanDisk Corp. SNDK 72 11.7 13.3 (11) 1.6 Basket Average $ 8.8 17.3 11 % 0.9
NVIDIA Corp. NVDA (18) 8.9 23.0 24 1.5
First Solar Inc. FSLR (4) 11.2 17.6 20 1.4 Industrials
KLA-Tencor Corp. KLAC 10 6.5 9.6 43 1.4 Masco Corp. MAS (6)% $ 4.5 33.3 84 % 2.0
Textron Inc. TXT 26 6.5 22.5 69 1.8
Basket Average $ 6.0 15.4 13 % 1.7 Cummins Inc. CMI 143 21.8 16.6 38 1.8
Flowserve Corp. FLS 28 6.7 15.5 17 1.7
Financials Caterpillar Inc. CAT 69 59.4 17.2 47 1.6
Cb Richard Ellis Group Inc CBG 51 % $ 6.6 22.5 35 % 2.4
Marshall & Ilsley Corp. MI 28 3.7 NM NM 2.2 Basket Average $ 19.8 21.0 51 % 1.8
Genworth Financial Inc. GNW 16 6.4 11.8 86 2.2
Zions Bancorp ZION 89 4.3 NM NM 2.2 Consumer Discretionary
ProLogis PLD 11 8.2 21.7 19 2.1 Goodyear Tire & Rubber GT (16)% $ 2.9 10.0 NM 2.1
Host Hotels & Resorts Inc. HST 54 11.9 20.5 38 2.1 Office Depot ODP (16) 1.5 NM NM 2.0
Janus Capital Group JNS (3) 2.4 15.6 18 2.1 Lennar Corp LEN 48 3.5 65.8 78 2.0
Regions Financial Corp. RF 33 8.8 NM NM 2.0 Gannett Co. GCI 3 3.6 6.6 (9) 2.0
Wynn Resorts WYNN 93 12.9 47.0 46 2.0
Basket Average $ 6.5 18.4 39 % 2.2
Basket Average $ 4.9 32.4 39 % 2.0
Energy
Massey Energy Co. MEE 29 % $ 5.5 20.2 NM 2.6 Materials
Consol Energy Inc. CNX (1) 11.0 17.3 25 2.1 AK Steel AKS (22)% $ 1.8 NM NM 2.6
Nabors Industries Ltd. NBR 7 6.7 15.5 59 2.0 Cliffs Natural CLF 71 10.6 9.5 36 2.5
Peabody Energy Corp. BTU 42 17.3 14.1 48 1.9
Rowan Cos. RDC 54 4.4 19.4 (7) 1.9 Basket Average $ 6.2 9.5 36 % 2.5
Pioneer Natural PXD 80 10.1 36.3 63 1.8
Utilities
Basket Average $ 9.2 20.5 37 % 2.1 AES Corp. AES (8)% $ 9.6 9.8 16 % 1.6
NRG Energy NRG (17) 4.8 13.8 (60) 1.1
Health Care
Tenet Healthcare Corp. THC 24 % $ 3.2 21.6 (10)% 1.5 Basket Average $ 7.2 11.8 (22)% 1.4
Intuitive Surgical ISRG (15) 10.1 26.6 18 1.1
PerkinElmer PKI 27 3.0 16.8 23 0.9 Telecommunication Services
King Pharmaceutical KG 15 3.5 21.0 2 0.9 Sprint Nextel Corp. S 16 % $ 12.6 NM NM 1.3
Boston Scientific BSX (16) 11.5 18.5 16 0.8
Coventry Health Care CVH 9 3.9 9.3 (21) 0.7
Dual Beta Basket Average $ 8.2 19.1 23 % 1.7
Basket Average $ 5.9 19.0 5% 1.0 S&P 500 Average 23.9 16.6 14 1.1
Source: Compustat, First Call, FactSet and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 20
January 7, 2011 United States
3. GSTHGROE – ROE Growth basket
Exhibit 46: Stocks with the best ROE growth outlook (Bloomberg ticker: <GSTHGROE>)
We recommend investors BUY our ROE Growth basket, introduced in December 2010, that consists of 50 S&P 500 stocks
with the best 2011 ROE growth on a sector-neutral basis. Stocks are selected based on Goldman Sachs equity analysts’
forecasts for earnings and book value growth. This strategy has outperformed the S&P 500 in 64% of quarters since 2005
by 43 bp per quarter on average. Our methodology was developed in a 30-year study using perfect information and then
tested with forward-looking analyst estimates over the past five years (22 quarters). To be eligible for the basket, we
applied a number of filters: (1) ROE growth between +50% and -50%; (2) LTM ROE greater than 1.0; (3) P/B between 0 and
25X (LTM); and (4) forecast ROE level between +100% and -100%. We expect companies that generate the highest ROE to
also experience P/B expansion.
See our report 2011 US equity outlook: Easy money, hard market (December 1, 2010) for more details.
Modeled Relative Performance Constituent attributes
108 x Key Criteria: Screen S&P 500 stocks with highest ROE
growth based on GS analysts’ estimates for the
106 subsequent 12-month period.
Relative Performance
Long GSTHGROE / x Growth: The basket is expected to grow 2011 sales
104 Short SPX
by 10% and earnings by 20% on average. The S&P
102 500 is expected to have lower average sales growth
and earnings growth (8% and 14%).
100
x Valuation: The average P/E of the basket trades at a
premium to the S&P 500 average (17.5x vs. 16.6x).
98
x Sector Exposure: The largest sectors include Info
96 Tech (19%) and Financials (17%).
Jul-10
Feb-10
Mar-10
May-10
Jun-10
Aug-10
Dec-09
Sep-10
Oct-10
Dec-10
Jan-10
Apr-10
Nov-10
Jan-11
x Performance: +3.4% since inception vs. +4.4% for the
S&P 500.
Source: FactSet and Goldman Sachs Global ECS Research.
Exhibit 47: Sector composition of GSTHGROE Basket
as of December 31, 2010
Telecom
Utilities Services
4% 2%
Materials
4% Info Tech
19%
Consumer
Discretionary
10%
Consumer
Staples
10% Financials
17%
Industrials
10%
Energy
Health Care 12%
12%
Source: FactSet, and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 21
January 7, 2011 United States
GSTHGROE: ROE Growth Basket Constituents
Exhibit 48: Constituents of the Goldman Sachs ROE Growth basket (Bloomberg ticker: <GSTHGROE>)
as of December 31, 2010
2010 GS Estimates 2010 GS Estimates
Total Price to ROE Forward ROE Total Price to ROE Forward ROE
Company Name Ticker Return Book LTM ROE Growth Company Name Ticker Return Book LTM ROE Growth
Information Technology Consumer Discretionary
Autodesk, Inc. ADSK 50 % 5.7 13 % 19 % 45 % Hasbro Inc. HAS 51 % 4.1 27 % 36 % 36 %
Juniper Networks Inc. JNPR 38 3.2 7 9 28 Family Dollar Stores FDO 81 4.4 25 33 32
Intuit, Inc. INTU 60 5.8 20 26 28 Time Warner Cable TWC 64 2.6 14 18 31
Akamai Technologies Inc. AKAM 86 4.6 8 11 28 Priceline.com PCLN 83 13.9 33 43 29
Red Hat Inc RHT 48 7.6 8 11 27 Fortune Brands, Inc. FO 42 1.7 8 10 29
Oracle Corp. ORCL 29 5.0 22 27 27
Symantec Corp. SYMC (6) 2.9 17 22 25 Basket Median 4.1 25 % 33 % 31 %
Broadcom Corporation BRCM 40 5.1 20 24 22 Sector Median 2.9 16 18 12
QUALCOMM Inc. QCOM 9 3.9 16 18 18
Visa Inc V (19) 2.1 12 14 15 Consumer Staples
Estee Lauder EL 69 % 7.8 26 % 34 % 30 %
Basket Median 4.8 14 % 19 % 27 % Procter & Gamble PG 9 2.8 17 21 27
Sector Median 3.2 19 19 (1) Campbell Soup CPB 6 11.3 79 98 24
Coca-Cola Co. KO 19 5.9 29 34 14
Financials The Hershey Company HSY 36 14.3 67 71 6
Legg Mason Inc LM 21 % 1.0 4% 6% 50 %
NASDAQ OMX Group NDAQ 20 0.8 6 8 39 Basket Median 7.8 29 % 34 % 24 %
Cb Richard Ellis Group Inc CBG 51 10.0 24 33 38 Sector Median 3.9 21 22 7
Plum Creek Timber Co. PCL 4 4.2 12 16 32
Ameriprise Financial AMP 51 1.4 10 13 26 Materials
U.S. Bancorp USB 21 2.0 12 14 23 Monsanto Co. MON (13)% 3.6 11 % 15 % 44 %
JPMorgan Chase & Co. JPM 2 1.0 9 12 23 Bemis Company BMS 14 2.0 10 14 41
Public Storage PSA 29 3.2 7 9 21
Basket Median 2.8 10 % 15 % 43 %
Basket Median 1.7 10 % 12 % 29 % Sector Median 3.3 12 16 13
Sector Median 1.3 7 9 12
Utilities
Energy Duke Energy DUK 10 % 1.1 6% 7% 32 %
Sunoco., Inc. SUN 57 % 1.8 6% 9% 50 % Sempra Energy SRE (3) 1.4 8 11 32
Peabody Energy Corp. BTU 42 4.3 17 25 50
Halliburton Co. HAL 37 4.0 15 23 48 Basket Median 1.2 7% 9% 32 %
Murphy Oil MUR 40 1.9 12 18 45 Sector Median 1.5 11 11 2
Chesapeake Energy Corp. CHK 1 1.5 8 10 25
Noble Energy NBL 22 2.3 11 13 25 Telecommunication Services
MetroPCS Communications PCS 66 % 1.9 9% 12 % 34 %
Basket Median 2.1 11 % 16 % 46 %
Sector Median 2.3 12 11 12 Sector Median 9 12 17
Health Care
Express Scripts ESRX 25 % 8.1 31 % 42 % 34 %
Abbott Labs ABT (8) 3.5 22 30 33
Baxter International Inc. BAX (12) 4.5 24 32 31
Cephalon Inc CEPH (1) 2.0 18 24 31
BIOGEN IDEC Inc. BIIB 25 2.9 19 24 24
Celgene Corp. CELG 6 5.8 19 23 19
Basket Median 4.0 21 % 27 % 31 %
Sector Median 2.9 19 19 2
Industrials
Caterpillar Inc. CAT 69 % 6.5 21 % 32 % 48 %
Ingersoll Rand IR 33 2.1 9 13 42
Parker-Hannifin PH 63 3.0 16 21 36
Eaton Corp. ETN 64 2.5 13 17 35
Honeywell Int'l Inc. HON 39 4.5 22 29 33
Basket Median 3.0 16 % 21 % 36 % ROE Basket Median 3.4 15 % 19 % 31 %
Sector Median 2.9 15 17 14 S&P 500 Median 2.6 14 15 8
Note: The ability to trade this basket will depend upon market conditions, including liquidity and borrow constraints at the time of trade.
Source: FactSet, Compustat, Goldman Sachs Research estimates and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 22
January 7, 2011 United States
4. GSTHSHRP – High Sharpe Ratio Basket
Exhibit 49: Stocks with high risk-adjusted returns using consensus price targets and options implied volatility
We recommend investors BUY our High Sharpe Ratio basket, introduced in December 2009 and last rebalanced in
December 2010 that consists of a sector-neutral portfolio of 50 stocks with the highest prospective ratio of return to risk.
We measure return by using the price return to a stock’s mean consensus price target and risk by using the 6-month
options implied volatility. The inclusion of a risk component creates approximately a 20% differentiation between the
Sharpe Ratio selection strategy and a pure return to target selection strategy.
See our Using Sharpe Ratios to enhance fund returns (March 19, 2010) for details.
Relative performance Constituent attributes
120 x Key Criteria: Screen S&P 500 stocks with high risk-
adjusted returns calculated as the ratio of return to
115 Relative Performance price target and 6-month implied volatility.
Long GSTHSHRP /
Short SPX Rebalanced semi-annually.
110 x Growth: The basket is expected to grow sales 6%
and earnings 8% on average in 2011, lower than
105 expected sales and earnings growth for the S&P 500
average (8% and 14%).
100
x Valuation: The basket has an average P/E of 13.1x, a
steep discount to the 16.6x for the S&P 500 average.
95
Sector Exposure: Largest sectors include Info Tech
Sep-10
Apr-10
Jan-10
Jul-10
Nov-10
Jan-11
Feb-10
Mar-10
Jun-10
Feb-11
May-10
Aug-10
Oct-10
Dec-09
Dec-10
x
(19%) and Financials (17%).
x Performance: +32.6% since inception vs. +16.4% for
S&P 500 and +26.6% YTD vs. +15.1% for S&P 500.
Source: FactSet and Goldman Sachs Global ECS Research.
Exhibit 50: GSTHSHRP has outperformed the S&P 500 on a risk-adjusted basis since inception
as of December 31, 2010
2.0
Realized Risk Adjusted Return Ratio "Sharpe" Strategy
<GSTHSHRP>
(31-Dec-09 to 31-Dec-10)
1.5 1.3
Return / Annualized Vol
GSTHSHRP vs. Top 200 Large-Cap Core Mutual Funds
S&P 500
1.0 0.8
0.5
0.0
(0.5)
Lower Sharpe Ratio Higher Sharpe Ratio
(1.0)
0 20 40 60 80 100 120 140 160 180 200
Large-Cap Core Mutual Funds
Source: Compustat and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 23
January 7, 2011 United States
GSTHSHRP: High Sharpe Ratio Basket Constituents
Exhibit 51: High Sharpe Ratio Basket Constituents (Bloomberg ticker: <GSTHSHRP>)
as of December 31, 2010
EARNINGS SALES VALUATION
2010 6-Mo Expected 2010E - 2011E - 2010E - 2011E - P/E GS
Total Expected Implied Return / 2011E 2012E 2011E 2012E Ratio Value
Company Name Ticker Rating Return Return Vol Implied Vol (%) (%) (%) (%) NTM Monitor
Consumer Discretionary
News Corporation NWSA Buy 8% 25 % 30 % 0.83 8% 13 % 3% 4% 13x (0.6)
Time Warner Inc. TWX Neutral 14 16 24 0.67 11 12 5 4 13 (0.7)
Apollo Group APOL NC (35) 26 41 0.64 (12) 6 (5) 3 9 (1.8)
Leggett & Platt LEG NC 17 16 27 0.62 13 34 3 3 18 0.6
Pulte Homes, Inc. PHM Neutral (25) 11 44 0.24 NM NM (6) 19 NM (0.0)
Consumer Staples
PepsiCo Inc. PEP Buy 11 14 16 0.88 12 % 12 % 8% 6% 15x (1.3)
Archer-Daniels-Midland ADM NC (2) 23 28 0.81 2 9 7 4 10 (0.6)
Procter & Gamble PG Buy 9 11 16 0.68 3 10 4 5 16 0.6
Tyson Foods TSN Neutral 42 20 33 0.62 (11) (1) 5 2 9 (0.5)
CVS Corp. CVS Buy 9 13 25 0.52 8 14 11 4 12 (0.6)
Energy
Southwestern Energy SWN Neutral (22) 20 34 0.60 (4)% 51 % 12 % 30 % 22x (0.8)
Halliburton Co. HAL Buy 37 19 36 0.52 38 20 14 11 16 0.4
Equitable Resources EQT NC 4 12 28 0.42 21 32 17 17 26 1.2
Devon Energy Corp. DVN Buy 8 9 26 0.34 (3) 36 (6) 17 14 0.7
Chesapeake Energy Corp. CHK Neutral 1 9 32 0.29 (7) 4 9 (6) 10 0.1
Chevron Corp. CVX Neutral 23 4 21 0.21 7 14 16 11 9 (0.1)
Financials
Bank of America Corp. BAC Buy (11) 35 37 0.96 39 % 31 % NM NM 10x (0.4)
JPMorgan Chase & Co. JPM Buy* 2 24 30 0.81 22 16 NM NM 10 (0.2)
SLM Corporation SLM NC 12 27 38 0.71 (13) 10 NM NM 7 (1.4)
PNC Bank Corp. PNC Neutral 16 17 30 0.58 1 11 NM NM 11 (0.3)
Prudential Financial PRU Not Rated 21 18 31 0.57 7 18 NM NM 10 (0.4)
MetLife Inc. MET Neutral 28 16 31 0.49 17 11 NM NM 9 0.3
Wells Fargo WFC Neutral 16 15 33 0.45 27 25 NM NM 12 (0.3)
Marshall & Ilsley Corp. MI NC 28 7 28 0.23 NM NM NM NM NM (1.3)
Health Care
Abbott Labs ABT Neutral (8) 26 19 1.40 12 % 8% 8% 5% 10x (2.0)
Pfizer, Inc. PFE Buy 0 21 23 0.91 4 (3) (2) (5) 8 (0.6)
Merck & Co. MRK Neutral 3 17 22 0.78 13 7 (1) (2) 10 (1.0)
McKesson Corp. MCK Not Rated 14 12 25 0.49 11 12 3 3 14 (0.7)
AmerisourceBergen Corp. ABC Buy* 32 10 26 0.37 11 14 3 3 14 0.5
Tenet Healthcare Corp. THC Neutral 24 1 29 0.02 (10) 18 4 3 22 (0.1)
Industrials
Donnelley (R.R.) & Sons RRD NC (17) 49 30 1.65 12 % 7% 8% 2% 10x (0.6)
Republic Services Inc RSG Buy 8 21 22 0.94 12 13 3 5 16 (0.0)
Rockwell Collins COL Neutral 7 22 24 0.91 13 12 6 7 15 0.2
Boeing Company BA Buy 24 25 29 0.86 13 24 8 13 15 0.0
General Electric GE Buy 24 15 27 0.55 16 19 (4) 1 15 (0.5)
Information Technology
Visa Inc V Buy (19) 41 31 1.34 19 % 16 % 12 % 11 % 15x (2.7)
Hewlett-Packard HPQ Sell (18) 28 27 1.01 13 9 5 4 8 (1.0)
Mastercard MA Buy (12) 28 33 0.84 19 19 11 11 14 (1.0)
Micron Technology MU Neutral (24) 37 46 0.80 (47) 18 7 5 12 (0.8)
Cisco Systems CSCO Neutral (15) 21 28 0.77 6 11 10 9 12 (1.2)
Microsoft Corp. MSFT Neutral (7) 17 25 0.68 13 11 8 7 11 (1.5)
Electronic Arts ERTS NC (8) 21 34 0.62 34 30 2 6 24 (0.5)
Adobe Systems ADBE Buy (16) 16 34 0.46 18 10 10 10 13 (1.2)
Corning Inc. GLW Neutral 1 14 31 0.44 (7) 5 11 9 10 (0.8)
Flir Systems Inc FLIR Neutral (9) 12 30 0.42 13 14 22 9 17 (0.3)
Materials
International Paper IP Buy 3 25 35 0.70 36 % 26 % 3% 4% 10x (0.3)
Alcoa Inc AA Neutral (4) 11 34 0.31 NM 17 8 7 16 (0.0)
Telecommunication Services
Sprint Nextel Corp. S Buy 16 27 43 0.63 NM NM 1% 1% NM (0.1)
Utilities
AES Corp. AES NC (8) 30 31 0.96 16 % 6% NM NM 10x (0.6)
NRG Energy NRG Neutral (17) 21 26 0.80 (60) (1) NM NM 14 (0.9)
GSTHSHRP Basket Median 18 % 30 % 0.63 8% 15 % 6% 7% 13x (0.5)
S&P 500 Median 6 28 0.24 14 15 8 7 17 0.1
Asterisk denotes Conviction List
Source: Compustat, First Call, I/B/E/S, IDC via FactSet and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 24
January 7, 2011 United States
5. GSTHDIVG – Dividend Growth Basket
Exhibit 52: Stocks returning cash to shareholders through dividends (Bloomberg ticker: <GSTHDIVG>)
We recommend investors BUY our dividend growth basket, introduced in December 2006 and last rebalanced in
December 2010, that consists of 50 stocks expected to grow dividends by an average of 22% a year over the next two
years (vs. 9% dividend growth for the average S&P 500 stock). Currently, the basket has an estimated 2012 dividend yield
of 3.2% (vs. 1.8% for the S&P 500 on average). Investors should use this basket to identify stocks returning cash to
shareholders through strong dividend growth and high dividend yields.
See our report 2011 US equity outlook: Easy money, hard market (December 1, 2010) for more details.
Relative performance Constituent attributes
120 x Key Criteria: Companies expected to increase
dividends over the next two years and a dividend
115 yield above that of the S&P 500 at rebalance.
x Growth: Average expected earnings growth in 2011
110 of 18% is higher than the average stock in the S&P
500 (15%) but expected sales growth on average is
105
lower (6% vs. 8%).
x Valuation: Trades at a large discount on average
100
Relative Performance
stock P/E (13.6x vs. 16.6x for S&P 500) with a higher
95
Long GSTHDIVG / average 2012 dividend yield (3.2% vs. 1.8%,
Short SPX
respectively).
90 x Sector Exposure: Largest sectors include Info Tech
Dec-06
Dec-07
Dec-08
Dec-09
Dec-10
Jun-07
Jun-08
Jun-09
Jun-10
(20%) and Financials (17%).
x Performance: +9.7% since inception vs. -2.6% for S&P
500 and +17.4% YTD vs. +15.1% for S&P 500.
Source: FactSet and Goldman Sachs Global ECS Research.
Exhibit 53: Sector composition of GSTHDIVG basket
as of December 31, 2010
Telecom
Utilities Services
Materials 4%
2% Info Tech
4%
20%
Consumer
Discretionary
9%
Consumer
Staples
10%
Financials
17%
Industrials
10%
Energy
Health Care 12%
12%
Source: FactSet and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 25
January 7, 2011 United States
Appendix A: US Portfolio Strategy baskets on Bloomberg
Permission to our GS Portfolio Strategy Baskets
To receive access to the Goldman Sachs US Portfolio Strategy <GSTH> Bloomberg page,
please follow the directions below:
1. Please go to your Bloomberg terminal and type IAM <go>.
2. Take a screen shot of the page.
3. Send the attachment and an e-mail to your Goldman Sachs salesperson requesting
access to the US Portfolio Strategy Bloomberg <GSTH> page.
Exhibit 54: Strategy baskets are listed on Bloomberg <GSTH>: Portfolio Strategy / Theme and Sector Baskets
Thematic Baskets Sector Baskets
Bloomberg
Bloomberg
<GSTH1> <GSTH2>
Cyclicals
Macroeconomic GSSBCYCL
GSTHBETA
GSTHINTL Defensives
GSTHAINT GSSBDEFS
GSTHBRIC
GSTHWEUR Global
GSSBGLBL
Fundamental
GSTHGROE Domestic
GSTHOPHI GSSBDOMS
GSTHOPLO
GSTHSBAL Global Cyclicals
GSTHWBAL GSSBGCYC
Hedge Fund Domestic Cyclical
GSTHHVIP GSSBDCYC
GSTHHFHI
GSTHHFSL Global Defensive
GSSBGDEF
Use of Cash
GSTHDIVG Domestic Defensive
GSSBDDEF
Valuation
GSTHGARP
GSTHSHRP
Note: The ability to trade baskets will depend upon market conditions, including liquidity and borrow constraints at the time of trade.
Source: Bloomberg and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 26
January 7, 2011 United States
Appendix B: Growth & Valuation for Thematic and Sector Baskets
Exhibit 55: Average Growth & Valuation for Thematic and Sector Baskets
as of December 31, 2010
EPS Growth Sales Growth
Beta 2010E - 2011E - 2010E - 2011E - Profit P/E Expd. Dividend
Bloomberg Price vs 2011E 2012E 2011E 2012E Margin Mult. ROE Yield
Ticker 31-Dec-10 SP500 (%) (%) (%) (%) 2011 NTM NTM (%)
THEMATIC BASKETS
ROE Growth GSTHGROE 103.36 1.1 20 % 16 % 10 % 7% 15 % 17.5x 24 % 1.4 %
High Sharpe Ratio GSTHSHRP 132.61 1.2 8 15 6 7 14 13.1 17 1.4
Dividend Growth GSTHDIVG 109.75 1.0 18 13 6 4 14 13.6 23 2.6
Low Operating Leverage GSTHOPLO 151.26 1.0 14 15 8 7 15 17.1 29 1.4
High Operating Leverage GSTHOPHI 175.34 1.2 16 16 9 6 10 17.2 18 1.2
MACROECONOMIC BASKETS
Dual Beta GSTHBETA 110.87 1.6 23 % 25 % 11 % 9% 9% 19.1x 16 % 0.6 %
International Sales GSTHINTL 132.77 1.2 15 16 10 8 15 16.6 25 1.4
Domestic Sales GSTHAINT 86.79 1.0 14 16 6 7 11 16.7 17 1.6
BRICs Sales GSTHBRIC 177.81 1.3 18 14 14 8 15 16.0 19 0.9
Western Europe Sales GSTHWEUR 180.37 1.3 18 16 11 9 11 17.7 19 1.0
HEDGE FUND BASKETS
Very-Important-Position (VIP) GSTHHVIP 93.56 1.1 19 % 19 % 13 % 8% 16 % 16.8x 23 % 1.0 %
S&P 500 High Hedge Fund GSTHHFHI 87.90 1.1 17 17 7 5 11 16.9 19 0.4
S&P 500 Low Hedge Fund GSTHHFSL 112.36 0.8 7 7 7 6 14 17.3 21 2.6
SECTOR BASKETS
Cyclicals GSSBCYCL 104.01 1.3 17 % 18 % 9% 8% 11 % 16.9x 18 % 1.4 %
Defensives GSSBDEFS 105.70 0.9 9 11 7 5 12 16.0 22 2.0
Global GSSBGLBL 106.53 1.2 15 16 8 7 13 17.1 23 1.4
Domestic GSSBDOMS 101.83 1.1 12 13 6 5 8 15.8 16 1.9
Global Cyclicals GSSBGCYC 107.35 1.3 17 19 9 8 12 17.5 21 1.3
Global Defensives GSSBGDEF 105.31 0.8 11 12 7 5 17 16.5 27 1.6
Domestic Cyclicals GSSBDCYC 98.25 1.3 17 17 6 5 9 15.9 14 1.6
Domestic Defensives GSSBDDEF 106.26 0.9 8 10 7 5 8 15.6 18 2.2
S&P 500 1,258 1.0 15 % 13 % 7% 6% 9 % 13.7x 17 % 1.9 %
S&P 500 Median 1.1 12 13 7 6 10 14.8 17 1.3
S&P 500 Average 1.1 14 15 8 7 12 16.6 20 1.6
Source: Compustat, FirstCall, I/B/E/S via FactSet and Goldman Sachs Global ECS Research.
Goldman Sachs Global Economics, Commodities and Strategy Research 27
January 7, 2011 United States
Equity basket disclosure
The Equities Division of the firm has previously introduced the basket of securities
discussed in this report. The Equity Analyst may have been consulted as to the
composition of the basket prior to its launch. However, the views expressed in this
research and its timing were not shared with the Equities Division.
Rating and pricing information
Abbott Laboratories (N/N, $48.17), Adobe Systems Inc. (B/A, $32.27), Advanced Micro
Devices, Inc. (S/N, $8.69), The AES Corp. (NC, $12.99), AK Steel Holding (S/N, $16.59),
Akamai Technologies, Inc. (B/A, $48.45), ALCOA (N/N, $16.36), Altria Group, Inc. (N/N,
$24.58), Amazon.com Inc. (B/A, $185.86), Ameriprise Financial, Inc. (N/A, $60.08),
AmerisourceBergen Corp. (B/A, $34.86), Amgen Inc. (S/C, $56.55), Analog Devices, Inc. (N/N,
$37.81), Apollo Group Inc. (NC, $39.47), Apple Inc. (B/N, $333.73), Archer-Daniels-Midland
(NC, $31.69), AT&T Inc. (B/N, $29.15), Autodesk Inc. (B/A, $41.26), Automatic Data
Processing Inc. (N/N, $48.00), Avon Products, Inc. (S/N, $30.14), Bank of America
Corporation (B/A, $14.44), Baxter International, Inc. (B/N, $50.25), BB&T Corp. (NC, $26.89),
Bemis Company, Inc. (N/N, $32.59), Biogen Idec, Inc. (S/C, $67.26), The Boeing Company
(B/A, $68.80), Boston Scientific Corp. (S/N, $7.41), Broadcom Corporation (B/N, $44.86),
Campbell Soup Co. (S/N, $34.62), Cardinal Health, Inc. (N/A, $39.35), Caterpillar, Inc. (NR,
$93.54), CB Richard Ellis Group Inc. (B/N, $20.74), Celgene Corp. (N/C, $58.99), Cephalon,
Inc. (N/N, $60.46), Chesapeake Energy Corp. (N/N, $26.67), Chevron Corp. (N/A, $90.69),
Cisco Systems, Inc. (N/N, $20.95), Citigroup Inc. (B/A, $4.95), CMS Energy Corp. (NC,
$18.71), The Coca-Cola Company (B/A, $63.03), ConocoPhillips (N/A, $66.97), Consol Energy
Inc. (S/N, $50.43), Constellation Brands (N/A, $19.84), Corning Inc. (N/N, $19.51), Coventry
Health Care, Inc. (N/A, $28.67), Cummins Inc. (B/N, $110.16), CVS Caremark Corp. (B/N,
$35.03), Darden Restaurants, Inc. (NC, $46.43), Devon Energy Corp. (B/N, $78.23), The Walt
Disney Company (B/A, $39.65), Dr Pepper Snapple Group (N/A, $36.58), Duke Energy
Corporation (S/N, $17.74), Eaton Corp. (B/A, $102.59), Electronic Arts, Inc. (NC, $16.23),
Equitable Resources Inc. (NC, $45.37), Express Scripts, Inc. (N/A, $57.01), Exxon Mobil Corp.
(N/A, $75.18), Family Dollar Stores, Inc. (N/N, $44.39), First Solar, Inc. (B/N, $134.53), FLIR
Systems, Inc. (N/C, $29.18), Flowserve Corp. (NC, $115.63), Fortune Brands, Inc. (N/A,
$61.80), Freeport-McMoRan Copper & Gold (B/N, $116.08), Gannett Company, Inc. (NC,
$15.23), General Electric Co. (B/A, $18.56), Genworth Financial, Inc. (NC, $14.21), Google Inc.
(B/A, $613.50), Halliburton Company (B/N, $38.22), Harris Corporation (NC, $46.33), Hasbro,
Inc. (B/A, $46.05), The Hershey Co. (S/N, $47.93), Hewlett-Packard Co. (S/N, $44.88), The
Home Depot, Inc. (N/N, $34.42), Honeywell International Inc. (N/A, $54.36), Host Hotels &
Resorts, Inc. (N/A, $18.32), Ingersoll-Rand PLC (N/A, $46.94), Intel Corp. (N/N, $20.77),
International Business Machines (N/N, $148.66), International Paper Company (B/N, $27.89),
Intuit, Inc. (N/A, $48.30), Intuitive Surgical, Inc. (S/N, $268.68), J.P. Morgan Chase & Co. (B/A,
$44.48), Jabil Circuit, Inc. (B/A, $21.45), Janus Capital Group Inc. (N/A, $13.45), JDS
Uniphase Corp. (NC, $16.04), Johnson & Johnson (N/N, $63.21), Johnson Controls, Inc.
(N/A, $40.34), Juniper Networks, Inc. (B/N, $38.21), King Pharmaceuticals, Inc. (N/N, $14.10),
KLA-Tencor (N/N, $38.20), Kraft Foods Inc. (N/N, $31.27), L-3 Communications Holdings Inc.
(S/C, $74.03), The Estee Lauder Companies Inc. (N/N, $81.08), Legg Mason, Inc. (N/A,
$35.58), Leggett & Platt, Inc. (NC, $23.02), Lennar Corp. (N/N, $19.14), Lorillard, Inc. (B/N,
$80.98), Lowe's Companies, Inc. (B/N, $24.13), Marshall & Ilsley Corp. (NC, $7.03), Masco
Corporation (S/N, $13.52), Massey Energy Co. (N/N, $54.65), Mastercard Inc. (B/N, $231.12),
McDonald's Corp. (N/A, $74.21), McKesson Corp. (NR, $74.86), Medtronic, Inc. (N/N, $36.51),
Goldman Sachs Global Economics, Commodities and Strategy Research 28
January 7, 2011 United States
MEMC Electronic Materials, Inc. (S/N, $11.35), Merck & Co., Inc. (N/N, $37.06), MetLife Inc.
(N/A, $46.38), MetroPCS Communications, Inc. (N/N, $13.30), Micron Technology Inc. (N/N,
$8.58), Microsoft Corp. (N/A, $28.82), Monsanto Co. (B/N, $70.79), Monster Worldwide, Inc.
(S/N, $25.27), Morgan Stanley & Co. (N/A, $28.80), Murphy Oil Corp. (B/A, $74.03), Nabors
Industries, Ltd. (B/N, $22.80), NASDAQ OMX Group Inc. (B/N, $23.55), National
Semiconductor Corp. (S/N, $14.08), The News Corp. (A) (B/A, $14.81), Noble Energy (N/N,
$82.63), Northeast Utilities (NR, $31.45), NRG Energy Inc. (N/N, $19.52), Nvidia Corp. (N/N,
$19.33), Occidental Petroleum Corp. (B/A, $96.46), Office Depot (N/N, $6.01), Oracle Corp.
(B/A, $31.17), Parker Hannifin Corp. (N/A, $85.91), Peabody Energy Corp. (B/N, $61.60),
PepsiCo, Inc. (B/A, $66.84), PerkinElmer, Inc. (N/N, $25.77), Pfizer Inc. (B/N, $18.18), Philip
Morris International Inc. (B/N, $57.72), Pioneer Natural Resources Co. (N/N, $87.98), Plum
Creek Timber Co. Inc. (N/N, $39.17), PNC Financial Services (N/A, $62.28), Priceline.com
Incorporated (B/N, $437.32), Procter & Gamble Company (B/N, $64.69), ProLogis (S/N,
$14.50), Prudential Financial, Inc. (NR, $61.42), Public Storage, Inc. (N/N, $101.77),
PulteGroup, Inc. (N/N, $8.23), QUALCOMM, Inc. (B/N, $52.67), R.R. Donnelley & Sons Co.
(NC, $17.61), Raytheon Company (N/C, $48.72), Red Hat, Inc. (N/A, $46.25), Regions
Financial Corp. (NC, $7.14), Republic Services, Inc. (B/N, $29.79), Rockwell Collins Corp.
(N/A, $59.43), Rowan Companies, Inc. (N/N, $32.86), SanDisk Corporation (N/N, $52.73),
Schlumberger, Ltd. (B/N, $80.53), Sempra Energy (B/C, $51.77), SLM Corp. (NC, $13.24),
Southwestern Energy Co. (N/N, $37.75), Sprint Nextel Corp. (B/N, $4.65), Sunoco, Inc. (S/N,
$40.75), SUPERVALU Inc. (NC, $9.20), Symantec Corp. (N/A, $17.69), Sysco Corp. (NC,
$29.86), Tenet Healthcare Corp. (N/N, $6.87), Teradyne, Inc. (B/N, $13.52), Textron Inc. (B/A,
$24.46), The Goodyear Tire & Rubber Co. (B/A, $12.27), Time Warner Cable Inc. (N/N,
$66.54), Time Warner Inc. (N/A, $33.27), Tyson Foods, Inc. (N/N, $16.56), United Parcel
Service, Inc. (B/A, $72.49), U.S. Bancorp (N/A, $26.29), United Technologies Corp. (B/A,
$79.15), Verizon Communications (N/N, $36.23), Visa Inc. (B/N, $73.17), Wal-Mart Stores, Inc.
(B/N, $53.96), Walgreen Company (B/N, $40.32), Wells Fargo & Company (N/A, $32.15),
Weyerhaeuser Co. (N/N, $20.02), Whole Foods Market, Inc. (N/A, $48.10), Wynn Resorts,
Limited (N/N, $114.67) and Zions Bancorporation (NC, $24.83).
Goldman Sachs Global Economics, Commodities and Strategy Research 29
January 7, 2011 United States
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Goldman Sachs Global Economics, Commodities and Strategy Research 30
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