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 UBS Investment Research
                                                                                                        Equity Strategy
 US Equity Strategy
                                                                                                        Investment Strategy

 1,425 on Improving Fundamentals
                                                                                                                                     7 February 2011
    Raising Year-End 2011 S&P 500 Price Target to 1,425
 We are raising our year-end 2011 S&P 500 price target to 1,425 from 1,325 on the
 back of an improving outlook for the economy and earnings. Our new target is
 based on a 13.7x forward P/E applied to a 2012 EPS estimate of $104. This
 represents an 8.7% increase from current levels — 10.7% including dividends.                                                 Jonathan Golub, CFA
     Earnings — An Improving Outlook                                                                                             jonathan.golub@ubs.com
                                                                                                                                         +1-212-713 8673
 Our upgrade is primarily driven by a reacceleration in economic data, which
 should support stronger top- and bottom-line growth. Despite rising commodity                                                       Chip Miller, CFA
 prices, margins should expand on the back of higher capacity utilization, cost                                                                  Strategist
 vigilance, and a more favorable sector mix. Cautious management guidance                                                            chip.miller@ubs.com
 should lead to further upside surprises.                                                                                                +1-203-719 3720
                                                                                                                              Manish Bangard, CFA
    Multiples — To Drift Higher                                                                                                                 Strategist
 At 13.5x forward EPS, multiples look cheap compared to historical averages and                                                 manish.bangard@ubs.com
 bond alternatives. Increasing dividends, buybacks, and M&A activity should be                                                           +1 212 713 3036
 supportive of higher stocks prices. A more pro-business tone in Washington                                           Thomas M. Doerflinger, Ph.D.
 should also support higher valuations.                                                                                                          Strategist
     Risks to Our Upgrade                                                                                                                +1-212-713 2540
 Given the 25% run in stocks over the past five months, we would not be surprised                                                Natalie Garner, CFA
 if the market pulls back for technical reasons. Should this occur, we would                                                                     Strategist
 recommend more aggressive buying. Further, we continue to expect episodic                                                        natalie.garner@ubs.com
 spikes in macro-driven volatility. In the absence of macro disruptions, we believe                                                       +1-212-713 4915
 there is upside risk to both our earnings and valuation forecasts.

                              Exhibit 1: Sector Recommendations
                                     Market Weight
                              Consumer Discretionary
                              Health Care
                              Consumer Staples
                              Telecom Svcs.
 Source: UBS

 This report has been prepared by UBS Securities LLC
 UBS 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.
US Equity Strategy 7 February 2011

1,425 on Improving Fundamentals
Summary of Price Target & Forecasts
We remain constructive on the outlook for U.S. equities, and are raising our
year-end 2011 S&P 500 price target to 1,425 from 1,325. Our new target is
based on a forward P/E of 13.7x applied to our 2012 EPS estimate of $104. This
implies an 8.7% price return and 10.7% total return from current levels.

                       Exhibit 2: S&P 500 Price Target
   S&P 500 Price Level                          Price               % Change       Our target is based on a 13.7x multiple
                                                                                   applied to our $104 2012 EPS target
      Current (as of 2/4/11)                             1,311
      2011 Year-End Target Price                         1,425        8.7%
Source: Standard and Poor’s and UBS

Following a sharp recovery in 2010, we expect EPS growth rates to remain
above average in 2011, before returning to a more normal 8-9% pace in 2012.

                   Exhibit 3: UBS S&P 500 Earnings Forecast
   Operating Earnings                           EPS                 Y/Y Growth
      2009 Actual                                        62.25
      2010 Estimate                                      86.00        38.2%
      2011 Estimate                                      96.00        11.6%
      2012 Estimate                                     104.00        8.3%
Source: Standard and Poor’s and UBS

Valuations are currently below historical levels and should expand modestly.
We note that multiples could move within a wide band as sovereign, geopolitical,
or other macro risks enter and exit the headlines. We believe that P/Es could
also end the year significantly higher if macro risks remain in check.

                                  Exhibit 4: S&P 500 P/E Forecast
   P/E Multiple                                          Current    2011 Target
      on NTM EPS                                         13.5x        14.8x
      on 2012 EPS                                        12.6x        13.7x
Source: Standard and Poor’s and UBS

Good with a Chance of Great
On December 1, 2010 we published our 2011 outlook, Good with a Chance of
Great. In that piece, we stated that risks were weighted to the upside for both
our earnings and valuation forecasts.

Over the past two months, several upside risks have, in fact, materialized. More
                                                                                   Conditions have improved substantially
specifically, consensus GDP forecasts have risen steadily on the back of better-
                                                                                   over the last several months
than-expected economic data, S&P 500 revenue and earnings surprises have
reaccelerated, and many investors believe Washington has taken a more pro-
growth, pro-business tone.

In the remainder of the piece, we discuss our updated outlooks for (1) the
economy; (2) earnings; (3) valuations; (4) risks; and (5) sector positioning.

                                                                                                                     UBS 2
US Equity Strategy 7 February 2011

#1 Economic Acceleration
As the UBS Economic Surprise Index below illustrates, economic data has
consistently surpassed expectations over the past five months.

                               Exhibit 5: Economic Surprise Index
  3     > 0 represents Positive Surprise
                                                                                     Economic data has crushed
  2                                                                                  expectations over the past five months


       < 0 represents Negative Surprise
      06              07                08                09           10       11

Source: Bloomberg and UBS Global Economics Team

This, in combination with the passage of a favorable tax package, has resulted in
a steep increase in consensus 2011 GDP estimates from under 2.5% to over
3.0%. Chief U.S. Economist Maury Harris recently raised his forecast to 3.3%.

                            Exhibit 6: Consensus 2011 GDP Forecast
                                                      UBS Forecast = 3.3%            We expect 3.3% GDP growth in 2011





       02/09        06/09            10/09        02/10        06/10    10/10

Source: Bloomberg and UBS

Further, UBS’s 1Q GDP forecast calls for 4.2% growth, a 1% improvement
from 4Q results.

A Solid Outlook
We believe that recent data indicate that risks remain weighted to the upside.
For example, the recent GDP report included a 7.1% quarterly (annualized)
increase in final demand, the highest level in over 20 years.

                                                                                                                      UBS 3
US Equity Strategy 7 February 2011

                                      Exhibit 7: Final Demand
  6                                                                                    At 7.1%, 4Q final demand was the
                                                                                       highest it’s been in over 20 years





      90     92       94       96       98      00      02       04   06   08   10
Source: BEA, FactSet and UBS

Moreover, according to ISM’s January Manufacturing report, a 60.8 reading
“corresponds to a 6.4% increase in real gross domestic product on an annual
basis”. New Orders — the most forward looking component of the report —
accelerated to 67.8, suggesting strong manufacturing activity in the months

                                     Exhibit 8: ISM New Orders
                                                                                       New Orders index suggests solid
                                                                                       manufacturing activity is likely to




   90       92       94        96      98      00      02        04   06   08   10
Source: ISM, FactSet and UBS

#2 Earnings Outlook Improving
On January 10, we raised our S&P 500 EPS estimates to $96 for 2011, and $104
for 2012, from $93 and $101, respectively. In addition to better economic data,
recent surprises and further margin upside are quite supportive of higher

Revenue Surprises Reaccelerate
Investors tend to focus on EPS, not revenues, during reporting season because
top-line surprises tend to be quite small after the initial phases of a recovery.
However, in 4Q10, revenue surprises reaccelerated to 2.7% — higher than the
level achieved during the market’s rebound in 4Q09.

                                                                                                                             UBS 4
US Equity Strategy 7 February 2011

                            Exhibit 9: S&P 500 (ex-Finls) Revenue Surprise
                                                                                                      Top-line surprises reaccelerated in

                      0.4                           0.5                        0.4

     2Q09           3Q09           4Q09           1Q10           2Q10         3Q10        4Q10E

Source: Standard and Poor’s, Compustat, FactSet and UBS

Margin Expansion Opportunities
While input costs are rising and margins appear close to prior cyclical peaks, we
expect margins to expand further in 2011.

Operating Leverage

Typically, margins rise as fixed costs are spread over greater volumes. While
strong cost controls accelerated the rebound in profitability, still-low utilization
rates should accommodate higher volumes without the need for a big pickup in
overhead costs.

                       Exhibit 10: Operating Margins vs. Capacity Utilization
 15%                                                                                 14.3% 82
                                                   14.8%                                              Low capacity utilization means
                                                                                                      companies still have significant
                       Capacity                                                             78
                                                                                                      operating leverage
 13%                   Utilization ►                                                 13.3%,

                            ◄ S&P 500 (ex-Finl.)
                              Operating Margins
   9%                                                                                            62
         00      01      02       03       04     05      06      07     08    09    10

Source: Federal Reserve, Standard & Poor’s, Compustat, FactSet and UBS

Mix Shift

During the last downturn, margins contracted across the board. As the economy
recovers, each sector’s profitability is improving in sync.

As the table below illustrates, the S&P 500 operating margin is approximately
3% below its most recent cyclical peak, 14.3 versus 14.8. By contrast, industry
group margins stand at 20% below peak levels. The reason for the discrepancy
is a change in mix between sectors toward higher margin stocks. We believe
this will lead to higher highs in the current cycle.

                                                                                                                                         UBS 5
US Equity Strategy 7 February 2011

                            Exhibit 11: Operating Margins Now vs. Peak
                                          3Q10A            Peak            Margin


   Technology                              22.0%           4Q09             22.6%   Industry group margins are 20% below
     Software                               27.4           4Q09             31.9    peak levels on average
     Hardware                               16.0           4Q09             17.6
     Semis & Equipment                      29.1           1Q00             34.9
   Industrials                              14.0           2Q07             16.8
     Capital Goods                          13.8           2Q07             17.0
     Commercial Svcs                        14.5           3Q00             17.7
     Transportation                         15.2           2Q06             16.5
   Cons Discretionary                       11.4           2Q10             11.7
     Autos                                  10.0           2Q09             11.6
     Durables & Apparel                     11.1           4Q05             13.7
     Consumer Svcs                          21.2           3Q10             21.2
     Media                                  18.6           2Q03             22.3
     Retailing                                6.7          4Q03              9.5
   Materials                                13.4           2Q06             15.9
   Energy                                   14.1           3Q08             22.1

   Health Care                              13.8           2Q00             18.6
     Healthcare Svcs                          7.0          3Q07              7.8
     Phama & Biotech                        29.7           2Q03             34.1
   Consumer Staples                         10.3           2Q05             11.8
     Food Retailing                           4.7          2Q05              7.3
     Food, Bev & Tob                        18.4           2Q01             19.8
     Household Prod                         20.0           4Q03             26.8
   Telecom Svcs                             17.1           3Q00             27.8
   Utilities                                22.2           3Q09             23.7
S&P 500

   S&P 500 (ex-Finl.)                       14.3           3Q06             14.8
Source: Standard & Poor’s, Compustat, Thomson Financial, FactSet and UBS

                                                                                                                   UBS 6
US Equity Strategy 7 February 2011

Surprises on the Rise
While typically earnings surprises decline as a recovery matures, current quarter
results appear to show a reacceleration.

                                     Exhibit 12: Earnings Surprises

                    11.5                                                                                   Earnings surprises reaccelerated in
                                     9.9                                                                   4Q10, defying the pattern of smaller
                                                   8.9                                                     surprises as the cycle matures

     2Q09           3Q09           4Q09           1Q10           2Q10       3Q10         4Q10E

Source: Standard & Poor’s, Compustat, Thomson Financial, FactSet and UBS     Note: S&P 500 ex-Financials

More to Come
Despite strong earnings results, consensus expectations have not meaningfully
increased. As illustrated below, outside of Energy and Materials — where rising
commodity prices have driven revisions — there hasn’t been much change to
2011 EPS estimates. This suggests to us that analysts’ forecasts remain overly
conservative, setting the market up for future beats.

                                   Exhibit 13: 2011 EPS Revisions
                     6.0                                                                                   Analysts’ revisions remain subdued,
                                                                                                           setting the market up for future beats


                                                                 -0.9       -1.1           -1.2

     Matr          Energy          Tech            Indls         Non-      C. Disc.       Finls

Source: Standard & Poor’s, Compustat, Thomson Financial, FactSet and UBS

                                                                                                                                             UBS 7
US Equity Strategy 7 February 2011

#3 Multiples to Drift Higher
At 13.5x, today’s P/E is approximately 10% below the 20 year average of 15.0x.
The market appears even more undervalued relative to bond yields, which imply
a 16.4x multiple.

Shareholder-Friendly Behavior
Over the last several quarters we have seen an increase in dividends, buybacks,
and M&A. Each of these shareholder-friendly activities should support higher
stock prices.


Historically, dividends drift higher in a relatively consistent manner. By
contrast, share repurchases have increased materially over the past several
quarters. We expect this pattern to continue throughout 2011 and beyond.

                                   Exhibit 14: Dividends vs. Buybacks
             $B                                                Buybacks ►                                      Robust buyback activity should help
 120                                                                                                           support the market



                                                                ▲ Dividends

        99        00        01     02     03        04     05      06    07      08        09     10

Source: Standard & Poor’s, Compustat, FactSet and UBS                            Note: S&P 500 ex-Financials

M&A Rising

In addition, we expect M&A activity to continue to pickup as it has over the past
year. Large cash balances, growing business confidence, still-low valuations,
and a large gap between large- and small-cap margins, all support this trend.

                                               Exhibit 15: M&A

                                              255                                    268
                                                                               244                             A large gap between large- and small-
                                                                                                               cap profitability suggests that deal
                                  180                                                                          synergies should be meaningful
                                                                   157                                 165
                            151                     143
                                                          96 98                                  101
              87 90

        94             96         98          00          02        04         06          08          10

Source: MergerStat, FactSet and UBS

                                                                                                                                                UBS 8
US Equity Strategy 7 February 2011

Washington Moves Toward the Center
Following a drubbing in the mid-term elections, we have seen a shift in
sentiment emanating from within the Beltway. We see this as an important
development which should also support higher valuations.

We believe that the December tax compromise, and recent shift in tone,
contributed significantly to the rise in consensus GDP forecasts.

#4 Risks
Trees Don’t Grow to the Sky

Since the end of August, the market has risen for five straight months and is now
25% higher. Given the strength of this run, we wouldn’t be surprised if the         We would view a short-term pullback in
market pulled back for technical reasons alone. If this were to occur, we would     the market as a buying opportunity
view it as a buying opportunity.

Headwinds to Valuation

We expect episodic spikes in macro-driven volatility. Further, rising inflation
and concerns over monetary policy are likely to rise as the year progresses.
These headwinds are most acute in emerging markets.

Great Not Good

Should macro risks remain in check, we believe there is substantial upside to our
earnings and valuation forecasts. While investors might not see this as a risk in   On balance, we think the risks to our
the traditional sense, under-investing in a powerful recovery could prove to be a   outlook remain to the upside

#5 Sector Positioning
Consistent with our constructive call on the market, we have a pro-cyclical bias
toward sector positioning. We remain overweight Technology, Industrials and
Financials, and underweight Staples, Telecom and Utilities.

Overweight Sectors
    Technology. The sector remains attractive on valuation and has the best
    prospective long-term revenue growth among cyclical sectors.

    Industrials. Given the group’s later stage nature, it has significant margin
    upside from current levels.

    Financials. There are a number of tailwinds supporting Financials including
    (1) improving loss trends; (2) a turn in C&I and consumer loan volumes; (3)
    a steeper yield curve; (4) a more favorable backdrop for investment banking
    activity; and (5) attractive valuations.

Underweight Sectors
    Consumer Staples. We expect Staples to underperform as the broader
    market is driven higher by earnings upside. We are least optimistic on
    companies exposed to low-end consumer spending, which should lag if
    employment remains soft and credit remains constrained.

                                                                                                                      UBS 9
US Equity Strategy 7 February 2011

    Telecom. Rising interest rates are a headwind for the sector. Telecom also
    remains expensive and faces a challenging long-term competitive

    Utilities. Like Telecom, interest rates could hold back the group and the risk
    from increasing environmental regulation is high.

    Analyst Certification

Each research analyst primarily responsible for the content of this research
report, in whole or in part, certifies that with respect to each security or issuer
that the analyst covered in this report: (1) all of the views expressed accurately
reflect his or her personal views about those securities or issuers; and (2) no part
of his or her compensation was, is, or will be, directly or indirectly, related to
the specific recommendations or views expressed by that research analyst in the
research report.

                                                                                       UBS 10
US Equity Strategy 7 February 2011

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This report has been prepared by UBS Securities LLC, an affiliate of UBS AG. UBS AG, its subsidiaries, branches and
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For information on the ways in which UBS manages conflicts and maintains independence of its research product;
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UBS Investment Research: Global Equity Rating Allocations
                                                                                                   1                                2
 UBS 12-Month Rating                 Rating Category                                     Coverage                      IB Services
 Buy                                 Buy                                                       49%                             40%
 Neutral                             Hold/Neutral                                              42%                             35%
 Sell                                Sell                                                        8%                            21%
                                                                                                   3                               4
 UBS Short-Term Rating               Rating Category                                     Coverage                      IB Services
 Buy                                 Buy                                               less than 1%                            14%
 Sell                                Sell                                              less than 1%                             0%
1:Percentage of companies under coverage globally within the 12-month rating category.
2:Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within
the past 12 months.
3:Percentage of companies under coverage globally within the Short-Term rating category.
4:Percentage of companies within the Short-Term rating category for which investment banking (IB) services were provided
within the past 12 months.

Source: UBS. Rating allocations are as of 31 December 2010.
UBS Investment Research: Global Equity Rating Definitions
 UBS 12-Month Rating                 Definition
 Buy                                 FSR is > 6% above the MRA.
 Neutral                             FSR is between -6% and 6% of the MRA.
 Sell                                FSR is > 6% below the MRA.
 UBS Short-Term Rating               Definition
                                     Buy: Stock price expected to rise within three months from the time the rating was assigned
                                     because of a specific catalyst or event.
                                     Sell: Stock price expected to fall within three months from the time the rating was assigned
                                     because of a specific catalyst or event.

                                                                                                                              UBS 11
US Equity Strategy 7 February 2011

 Forecast Stock Return (FSR) is defined as expected percentage price appreciation plus gross dividend yield over the next 12
 Market Return Assumption (MRA) is defined as the one-year local market interest rate plus 5% (a proxy for, and not a
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 Under Review (UR) Stocks may be flagged as UR by the analyst, indicating that the stock's price target and/or rating are
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When such exceptions apply, they will be identified in the Company Disclosures table in the relevant research piece.

Research analysts contributing to this report who are employed by any non-US affiliate of UBS Securities LLC are not
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UBS Securities LLC: Jonathan Golub, CFA; Chip Miller, CFA; Manish Bangard, CFA; Thomas M. Doerflinger, Ph.D.; Natalie
Garner, CFA.

Unless otherwise indicated, please refer to the Valuation and Risk sections within the body of this report.

                                                                                                                             UBS 12
US Equity Strategy 7 February 2011

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