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The Goldman Sachs Group, Inc.

Goldm an Sachs Research

Where to Invest Now

Scaling the Peak

February 2013

David J. Kostin Goldman, Sachs & Co.

Chief US Equity Strategist 212-902-6781

Global ECS Research -- US Portfolio Strategy david.kostin@

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 and other important disclosures, see the Disclosure Appendix or go to research/hedge.html.

Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

2013 US equity strategy

Look past politics to improving economic growth

Index: S&P 500 year-end 2013 target of 1575

? Economy: US economic growth accelerating from 1.8% in 2013 to 2.9% in 2014; low inflation; low interest rates. ? Earnings: We forecast operating EPS of $107 in 2013 and $114 in 2014 (bottom-up consensus is $112 and $124). ? Valuation: Six approaches triangulate on 1540. Our target implies multiple of 13.8x, consistent with current multiple. ? Money flow: We forecast $200 billion of net inflow into US equities. $450 billion of Buybacks will offset retail outflow.

Risks to our forecast: Margins and Money Flow

? Margins: Margins have been stable for 2 years. We expect trend will persist in 2013. Consensus expects margins to rise. ? Money flow: Institutional reallocation to stocks may be higher than we expect, offsetting retail outflow, and lifting P/Es.

Sectors: Cyclicals should outperform given accelerating economic growth

? Overweight: Cyclical sectors (Materials, Industrials, and Information Technology); ? Underweight: Defensive sectors (Consumer Staples, Health Care, and Telecom).

Themes: Selectively seek growth in 2013

1. Buy stocks / sell bonds. Re-allocate assets away from Treasuries and into equities. 2. Buy Global Cyclicals. Materials, Industrials, Tech have lagged vs. while Domestic Cyclicals (Financials & Consumer)

have rallied. 3. BRICs vs. US growth exposure. Basket offers better GDP growth and higher Beta (GSTHBRIC vs. GSTHAINT). 4. Own Double Sharpe Ratio stocks: Firms with high risk-adjusted earnings growth and price return ().

Note: The ability to trade baskets will depend upon market conditions, including liquidity and borrow constraints at the time of trade.

Goldman Sachs Global ECS Research

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We expect S&P 500 will remain flat in 1H before rising to new all-time high of 1575 by year-end 2013

1700 1600 1500 1400 1300 1200 1100 1000

The path to 1575

2011 debt ceiling crisis -17%

2012 election & fiscal

cliff -7%

Year-end 2013 1575

1500 1450

Sequester & continuing resolution

Earnings and Valuation 2007 peak vs. Current vs. Forecast

Earnings EPS (LTM)

Peak Current 9-Oct-07 20-Feb-13

Year-end 2013 forecast Goldman Sachs Consensus

$91 $103

$107

$113

EPS (NTM)

$103 $113

$114

$126

Expected Growth

12.5 % 9.7 %

6.5 % 11.7 %

Valuation (NTM P/E) 15.2 X 13.4 X

13.8 X

13.2 X

Index Level

1565 1512

1575

1654

S&P 500

Dec-10 Mar-11 J un -11 Sep -11 Dec-11 Mar-12 J un -12 Sep -12 Dec-12 Mar-13 J un -13 Sep -13 Dec-13 Mar-14

Source: FactSet , Compustat, FirstCall, I/B/E/S and Goldman Sachs Global ECS Research. As of February 20, 2013.

Goldman Sachs Global ECS Research

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We forecast S&P 500 EPS will rise 10% to $107 in 2013 and by 6% to $114 in 2014

S&P 500 Price

1800 1600 1400 1200 1000

800 600

24-Mar-00 Peak = 1527

Sep-00 EPS = $57

09-Oct-07 Peak = 1565

Jun-07 EPS = $91

S&P 500 EPS 2013E

$107

120 2014E $114

110

2011 2012E $96 $97

2013

Year-End

1575

100

6-mo

1500 90

3-mo

1450

80

S&P 500 Price

70

60

Sep-09 EPS = $40

09-Mar-09 Low = 677

Goldman Sachs

50

Forecasts

40

30

20

S&P 500 EPS

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 Dec-14 Dec-15

Source: Compustat, IDC via FactSet, and Goldman Sachs Global ECS Research. As of February 11, 2013.

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Our target reflects a forward P/E multiple of 13.8x at year-end 2013, between the 5- and 10-year averages

30 x Peak 26x

25 x

20 x

15 x

10 x

S&P 500 Forward P/E

5 x

Average 5-Year 10-Year 35-Year

Implied Forward P/E Index Level

13.1x

1490

14.3

1625

12.9

1465

Goldman Sachs 13.8x

1575

Year-end 2013E 13.8x

Trough 9x

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 Dec-14 Dec-15

Source: Compustat, IDC via FactSet, and Goldman Sachs Global ECS Research. As of February 11, 2013.

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Goldman Sachs US GDP forecast relative to consensus

GDP Growth (qoq annualized %)

2013-2014 Quarterly GDP forecasts

GDP forecasts 2011 - 2016E

5.0 % 4.0 %

Goldman Sachs Economics

3.0 %

Consensus

2.0 %

3.1 2.0 1.0 %

1.3

3.5 3.5 3.5

2.8

3.0 2.5

2.0

1.5

0.0 %

(0.1)

(1.0)% Q1A Q2A Q3A Q4A Q1E Q2E Q3E Q4E Q1E Q2E Q3E Q4E

2012

2013

2014

Real GDP Consumer Spending Business Fixed Investment Residential Investment Federal Spending Net Exports (Bil.)

Inflation Headline CPI Core CPI Core PCE

Unemployment Rate Fed Funds Rate 10-year Treasury Rate

% Annual Change 2011A 2012E 2013E 2014E 2015E 2016E

1.8% 2.5 8.6 (1.4) (2.8) (408)

2.2% 1.9 7.7 11.9 (2.2) (406)

1.8% 1.7 5.7 13.7 (5.3) (393)

2.9% 2.5 9.0 14.8 (5.9) (411)

3.2% 2.7 7.5 13.4 (2.5) (433)

3.0% 2.5 5.8 12.5 (1.2) (445)

3.1

2.1

1.7

1.8

2.0

2.1

1.7

2.1

1.7

1.8

1.9

2.1

1.4

1.7

1.3

1.5

1.6

1.8

8.9

8.1

7.7

7.3

6.7

6.3

0.1

0.2

0.1

0.1

0.1

1.3

1.9

1.8

2.2

2.8

3.3

3.8

Source: Bloomberg and Goldman Sachs Global ECS Research. As of February 15, 2013.

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S&P 500 1-Month Return

Our macro data surprise measure has fallen below consensus expectations

Rolling 1-Month US MAP Score

US-MAP (Macro data Assessment Platform) score vs. S&P 500 one-month return

75

20

Positive

Data Surprises

15

50

S&P 500

1-Month Return

(RHS)

10

25 5

0

0

(5) (25)

(10)

(50)

Rolling 1-Month US MAP Score (LHS)

(15)

Negative Data Surprises

(75)

(20)

Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13

Source: FactSet and Goldman Sachs Global ECS Research. As of February 8, 2013.

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Core PCE Year / Year Inflation (%) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18

Fed's dual mandate: Prices stable and below target while US economy is far from full employment

Inflation Rate

3.0

18%

2.5

16%

FOMC

Central Tendency

14%

2.0

12%

1.5

10%

1.0

GS Forecast

8%

6%

0.5

Goldman Sachs forecasts a more

benign path for core PCE inflation

4%

0.0

2%

Unemployment Rate

Underemployment Unemployment

GS Forecast

Fed Central Tendency

Source: Federal Reserve, Bureau of Labor Statistics and Goldman Sachs Global ECS Research. As of December 12, 2012 and February 1, 2013.

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