                                                                                                    Global Equity Rese...
US Equity Strategy 6 September 2011UBS Strategy & Economics Teams                                                       U....
US Equity Strategy 6 September 2011Table of ContentsOutlook   ▪ Market Outlook ……….…………………………………….……………………..…             ...
US Equity Strategy 6 September 2011Market OutlookOutlook Constructive on Stocks. We believe signs point to slow  growth —...
US Equity Strategy 6 September 2011Market OutlookMarket Leadership Sector Positioning. Since mid-February, defensives hav...
US Equity Strategy 6 September 2011S&P 500 Price & Earnings TargetsS&P 500 Price & Earnings TargetS&P 500 Price Level     ...
US Equity Strategy 6 September 2011Current EnvironmentS&P 500 vs. Cyclical Outperformance                                 ...
US Equity Strategy 6 September 2011Current EnvironmentVIX 60         12/31/2010: 17.75            06/30/2011: 16.52       ...
US Equity Strategy 6 September 2011Current EnvironmentEuropean CDS 1600 1400 1200 1000   800   600                        ...
US Equity Strategy 6 September 2011Current EnvironmentU.S. Economic Surprise Index  3     > 0 represents Positive Surprise...
US Equity Strategy 6 September 2011Past RecessionsPast Market Declines                                                    ...
US Equity Strategy 6 September 2011Revenues & MarginsS&P 500 Revenues vs. Nominal GDP  18%       Y/Y                      ...
US Equity Strategy 6 September 2011MarginsOperating Margins vs. CRB Raw Industrials 15%                                   ...
US Equity Strategy 6 September 2011MarginsLarge-cap vs. Small-cap EBIT Margins                                            ...
US Equity Strategy 6 September 2011Current & Peak Operating Margins                                           Current     ...
US Equity Strategy 6 September 2011ValuationDow Jones Industrials — Super Cycle               Log Scale 10,000            ...
US Equity Strategy 6 September 2011ValuationS&P 500 E/P vs. 10 Yr Treasuries(Great Moderation/The Fed Model) 16           ...
US Equity Strategy 6 September 2011ValuationS&P 500 E/P vs. Inflation (Disco Regime) 16                                   ...
US Equity Strategy 6 September 2011ValuationNTM P/E – Cyclicals vs. Non-Cyclicals 16                                      ...
US Equity Strategy 6 September 2011Inter-Sector Relative ValuationsRelative Valuation – Overvalued/Undervalued            ...
US Equity Strategy 6 September 2011Inter-Sector Relative ValuationsIndustrials vs. Technology                         2.6 ...
US Equity Strategy 6 September 2011Inter-Sector Relative ValuationsTelecommunication Services vs. Utilities               ...
US Equity Strategy 6 September 2011Market LeadershipUBS Market Leadership Framework     I. Early Phase                    ...
US Equity Strategy 6 September 2011Market Leadership — Return DriversPrice Volatility & Operating Leverage  4%            ...
US Equity Strategy 6 September 2011Market Leadership — Return DriversOp Lev Return Index vs. Op Margins                   ...
US Equity Strategy 6 September 2011Market Leadership — Return DriversForeign Sales Return Index 135                       ...
US Equity Strategy 6 September 2011Earnings Analysis2Q11 Earnings Scorecard                                               ...
US Equity Strategy 6 September 2011Earnings AnalysisS&P 500 Earnings Surprise               11.5                          ...
US Equity Strategy 6 September 2011Earnings AnalysisEarnings Surprise – Cyclicals vs. Non-cyclicals              15       ...
US Equity Strategy 6 September 2011Earnings Analysis2Q11 Price Response to Surprises                            2Q11      ...
US Equity Strategy 6 September 2011Earnings Analysis2Q11 Serial Correlation of Revenue Surprises                          ...
US Equity Strategy 6 September 2011Sector ReturnsS&P 500 SectorsIndex                                  Aug-11        QTD  ...
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
Financial Pacific - Slow growth but no Recession (third party)
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Financial Pacific - Slow growth but no Recession (third party)

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Financial Pacific - Slow growth but no Recession (third party)

  1. 1.  Global Equity Research Americas UBS Investment Research Equity Strategy US Equity Strategy Investment Strategy Market Navigator — September 2011 6 September 2011  Welcome To The Market Navigator www.ubs.com/investmentresearch This monthly guide provides a summary of the UBS US equity market outlook, as well as proprietary analytics and other useful information about market returns, corporate profits, valuation, sectors, the economy, and credit. Jonathan Golub, CFA  Slow Growth But No Recession Strategist After dropping 13%, the market ended down 5% in August. We believe the jonathan.golub@ubs.com +1-212-713 8673 economy will experience slow growth — not a recession. As such we expect stocks to advance through the end of the year. That said, we expect markets to Manish Bangard, CFA remain quite volatile with European debt issues our main concern. While Strategist consumer and business survey data indicate a lack of confidence in the economy, manish.bangard@ubs.com +1-212-713 3036 more direct measures of activity such as retail sales and durable goods orders remain healthy. Daniel Murphy Strategist  14 Of The Past 9 daniel-d.murphy@ubs.com Since the end of World War II, there have been 14 instances where the S&P 500 +1-212-713 3186 fell by more than 17%. Only nine of these were accompanied by recessions. Vishal Patel Importantly, when recession was avoided, equities advanced an average of 15% Associate Strategist during the first four months after reaching a trough and 28% over one year. vishal-a.patel@ubs.com +1-212-713 4027  Price Target Of 1,350 Represents 15% Upside Thomas M. Doerflinger, Ph.D. We are trimming our 2011 and 2012 S&P 500 EPS estimates to $95.00 and Strategist $101.00 from $99.35 and $108.00 to reflect UBS’s recently lowered global growth tom.doerflinger@ubs.com outlook. Consistent with these changes, we are paring our year-end 2011 S&P 500 +1-212-713 2540 price target to 1,350 from 1,425. Natalie Garner, CFA Strategist natalie.garner@ubs.com +1-212-713 4915 This report has been prepared by UBS Securities LLC ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 60. 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.
  2. 2. US Equity Strategy 6 September 2011UBS Strategy & Economics Teams U.S. Equity Strategy Jonathan Golub Chief Strategist jonathan.golub@ubs.comManish Bangard Strategist manish.bangard@ubs.com Chip Miller Small-cap Strategist chip.miller@ubs.comDaniel Murphy Strategist daniel-d.murphy@ubs.com Tom Doerflinger Strategist tom.doerflinger@ubs.comVishal Patel Associate vishal-a.patel@ubs.com Natalie Garner Strategist natalie.garner@ubs.comU.S. Economics Global Economics & StrategyMaury Harris Chief Economist maury.harris@ubs.com Chief Economist Larry Hatheway larry.hatheway@ubs.comDrew Matus Economist drew.matus@ubs.com & StrategistSamuel Coffin Economist samuel.coffin@ubs.com Paul Donovan Economist paul.donovan@ubs.comKevin Cummins Economist kevin.cummins@ubs.com Andrew Cates Economist andrew.cates@ubs.comU.S. Accounting George Magnus Senior Advisor george.magnus@ubs.comJanet Pegg Analyst janet.pegg@ubs.com Jonathan Anderson Emg Markets jonathan.anderson@ubs.comU.S. Derivatives Sunil Kapadia Asset Allocation sunil.kapadia@ubs.comMitchell Revsine Strategist mitchell.revsine@ubs.com Global Equity StrategyBrian Russo Associate brian.russo@ubs.com Jeffrey Palma Chief Strategist jeffrey.palma@ubs.comU.S. Sector Heads Chris Ferrarone Strategist christopher.ferrarone@ubs.comAndrew Kligerman Financials andrew.kligerman@ubs.com Jerry McGuire Associate jerry.mcguire@ubs.comNikos Theodosopoulos Technology nikos.theodosopoulos@ubs.com Global Emerging Markets StrategyDavid Strauss Industrials david.strauss@ubs.com Nicholas Smithie Strategist nicholas.smithie@ubs.comDavid Palmer Consumer david-s.palmer@ubs.com Jennifer Delaney Strategist jennifer.delaney@ubs.comJohn Hodulik Telecom john.hodulik@ubs.com Stephen Mo Strategist stephen.mo@ubs.comBill Featherston Energy william.featherston@ubs.com Regional EconomicsRon Barone Energy ronald.barone@ubs.com Stephane Deo Europe stephane.deo@ubs.comJustin Lake Health Care justin.lake@ubs.com Amit Kara UK amit.kara@ubs.comRegional Strategy Duncan Wooldridge Asia duncan.wooldridge@ubs.comNick Nelson Europe nick.nelson@ubs.com Scott Haslem Australia scott.haslem@ubssecurities.comKaren Olney Europe karen.olney@ubs.com Tao Wang China wang.tao@ubssecurities.comNeil Cherry UK neil.cherry@ubs.com Credit, Rates & Currency StrategyGeorge Vasic Canada george.vasic@ubs.com George Bory Credit george.bory@ubs.comShoji Hirakawa Japan shoji.hirakawa@ubs.com Michael Schumacher Rates michael.schumacher@ubs.comNiall MacLeod Asia x-Japan niall.macleod@ubs.com Mansoor Mohi-Uddin Currency mansoor.mohi-uddin@ubs.comDavid Cassidy Australia david.cassidy@ubs.com Bhanu Baweja EM FICC bhanu.baweja@ubs.comJohn Tang China john.tang@ubs.com Quantitative StrategyTomas Lajous Mexico tomas.lajous@ubs.com David Jessop Global Head david.jessop@ubs.com Berry Cox US Head berry.cox@ubs.com UBS 2
  3. 3. US Equity Strategy 6 September 2011Table of ContentsOutlook ▪ Market Outlook ……….…………………………………….……………………..… 4-5 Highlights ▪ S&P 500 Targets & Key Calls ...…………….………………………...…………... 6Equities ▪ Current Environment .…..……………………………………………....…………... 7-10 • Market Outlook — ▪ Past Recessions ……….………....…………………....………..………………...... 113 Pages 4-5 ▪ Revenues & Margins …………....…………………....………..………………...... 12-15 ▪ Valuation ..………………..…………….………….……..……………..……...…… 16-22 ▪ Market Leadership ……………...…………….……..…….………………..……… 23-26 ▪ Earnings Analysis ………………………………………...……...……...…………. 27-31 • Current Environment — ▪ Index Returns .................................................................................................... 32-34 Pages 7-10 ▪ Correlations & Leading Indicators ……………….………..……………………….. 35 ▪ Sector Recommendations .….………………….……………………..……...…… 36-37 ▪ Cash, Balance Sheet & Corporate Spending …………..……………………….. 38-41 • Valuation —Economy Pages 16-22 ▪ ISM ………………..……………………………….…………………………...…….. 42 ▪ Inflation & Currencies ………………………………………………………………. 43-45 ▪ Employment ………..………………………………………….…………................ 46 ▪ Retail Sales, Savings & Wealth …………………….……………………………… 47 • Market Leadership — ▪ Housing ………………………………………………………….…………………… 48 Pages 23-26 ▪ Loan Volumes & Delinquencies …………………………………………………… 49 ▪ US Fiscal Imbalances ……………....……...………………………….…………… 50-51Credit • Sector Recommendations — Pages 36-37 ▪ Yield Curves & Treasuries ………………...……………..…………………...…… 52-54 ▪ Bond Spreads …………………………………………………….…….…………… 55Appendix • Inflation & Currencies — ▪ S&P 500 Valuation …..……………………..…………..……………..……………. 56 Pages 43-45 ▪ Inter-Sector Valuations .……………………..…………..…………………………. 57 ▪ UBS Return Drivers ….……………………..…………..……………..……………. 58-59All data as of 08/31/2011 unless noted otherwise. UBS 3
  4. 4. US Equity Strategy 6 September 2011Market OutlookOutlook Constructive on Stocks. We believe signs point to slow growth — not a recession — and expect stocks to drift higher as We anticipate a relief rally as worst-case outcomes are avoided and risk appetite improves. the economy avoids recession While recent survey data indicate a lack of confidence in the and risk appetite improves economy, more direct measures of activity such as retail sales and durable goods orders are stronger. 14 of the Past 9. By our count, the S&P 500 predicted 14 of The market has a less-than- the past nine recessions which suggests the market is not a impressive track record in particularly good early indicator of economic downturns. Of predicting recessions the five non-recessionary periods, the market was up an average of 15% during the first four months after the trough and 28% over one year. Economic Soft Patch Extended. 2Q GDP was revised down from 1.3% to 1.0% and 1Q grew just 0.4%. We believe that Debt issues in U.S. and Europe are prolonging the economic debt and budgetary issues in Europe and the U.S. will weigh on soft patch 2H11 growth. Chief U.S. Economist Maury Harris recently lowered 3Q11 GDP to 1.5% from 2.5%.. Valuation. At 10.9x forward EPS, stock multiples are well below long term averages. Attractive valuations, improving M&A activity, and large share repurchases should help drive stock prices higher. Valuation is well below long term averages Trimming S&P 500 EPS. We are trimming our 2011 and 2012 S&P 500 EPS estimates to $95.00 and $101.00 from $99.35 and $108.00, respectively. This change reflects our economists’ view that the global economy will be weaker, though non-recessionary. More specifically, UBS recently lowered its forecast for 2012 global GDP growth to 3.3% from 15% upside to our new 2011 3.8%. year-end S&P 500 target of 1350 Year-end S&P 500 Price Target to 1,350. Consistent with these changes, we are lowering our 2011 year-end price target for the S&P 500 to 1,350 from 1,425. This forecast represents a 15% upside from current levels. UBS 4
  5. 5. US Equity Strategy 6 September 2011Market OutlookMarket Leadership Sector Positioning. Since mid-February, defensives have led the market, however, this leadership has reversed course over We favor cyclicals including the past couple of weeks. Looking to the remainder of 2011, Tech, Industrials and we favor economically sensitive names. More specifically, we Financials expect Tech, Industrials and Financials to do especially well in an up market. We are underweight Staples, Telecom and Utilities. Small Caps. During the current soft patch, smaller companies have underperformed their larger peers. We expect small-caps Small caps should regain to regain their leadership role as they benefit from margins that their leadership are much further from peak levels. M&A trends are also a positive. Large Caps. S&P 500 margins are close to cyclical peaks. As a result, companies exhibiting strong top-line success should remain clear winners in this universe.Risks European Sovereign Debt: We believe the greatest risk to U.S. stocks is the potential for a credit disruption emanating from Europe. Global Growth. Fallout from the debt debate has extended the economic soft patch in the U.S. Separately, monetary tightening across emerging economies has led to heightened Government policy is growth concerns in a number of markets. constrained Fiscal Policy. While the fight over raising the debt ceiling is over, the appointment of a super committee to find ways to reduce debt should extend the policy debate. Monetary Policy. The Fed is constrained by the lower bound on interest rates and the effectiveness of alternative tools, such as quantitative easing, is unclear. Inflation. Despite the economic slowdown, the most recent headline inflation data came in ahead of expectations, suggesting that inflationary pressures could be less transitory than the Fed, and many investors, believe. UBS 5
  6. 6. US Equity Strategy 6 September 2011S&P 500 Price & Earnings TargetsS&P 500 Price & Earnings TargetS&P 500 Price Level Price % Change Current (as of 09/02/11) 1,174 Our 1,350 target represents a 2011 Year-End Target Price 1,350 15.0% 15% upside from currentOperating Earnings EPS Y/Y Growth levels 2009 Actual 62.25 0.6% 2010 Actual 85.49 37.3% 2011 Estimate 95.00 11.1% 2012 Estimate 101.00 6.3% Current Year-EndP/E Multiple Price Price on UBS 2011 EPS 12.4x 15.8x on Consensus NTM EPS of $107.93 10.9x 12.5x on Consensus 2012 EPS of $112.56 10.4x 12.0x on UBS 2012 EPS 11.6x 13.4xSource: Standard & Poor’s and UBS Note: Table updated as of Sep.2, 2011UBS Key CallsTicker Company Ticker CompanyAAPL Apple Inc. F FordBHI Baker Hughes GE General ElectricCAH Cardinal Health GOOG GoogleCELG Celgene JOYG Joy GlobalC Citigroup PRU Prudential FinancialCNX Consol Energy QCOM QualcommDOW Dow Chemical SNDK SanDiskDE Deere & Co.Source: UBS Note: All stocks are rated ‘Buy’ by UBS analysts. Updated as of Sep.2, 2011 UBS 6
  7. 7. US Equity Strategy 6 September 2011Current EnvironmentS&P 500 vs. Cyclical Outperformance Feb 2011 95 1360 Cyclicals have Cycl. vs. ► 88 underperformed since mid- Non-Cycl. February 1185 81 1010 74 835 ◄ S&P 500 67 660 60 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11Source: Standard & Poor’s, Haver, FactSet and UBSNote: Cyclical Outperformance indexed to 100 as of December 31, 2004Pair-wise Correlations 1.0 0.9 Higher stock correlations pose a challenge for 0.8 investors 0.7 0.6 0.5 0.4 0.3 0.2 04 05 06 07 08 09 10 11Source: S&P, FactSet and UBS Note: Data calculated for S&P 500 Industry Groups on a 30-day rolling basis UBS 7
  8. 8. US Equity Strategy 6 September 2011Current EnvironmentVIX 60 12/31/2010: 17.75 06/30/2011: 16.52 The VIX rose in August due 08/31/2011: 31.62 50 to macro concerns in the US and Europe 40 31.6 30 20 10 90 92 94 96 98 00 02 04 06 08 10Source: CBOE, FactSet and UBSS&P 500 Volatility Skew 32 Near-term implied volatility 28 has risen more than longer-term 24 08/31/11 ▲ 12/31/10 ▼ 20 16  6/30/11 12 1M 3M 6M 9M 12MSource: Bloomberg and UBS Note: All periods reflect annualized numbers UBS 8
  9. 9. US Equity Strategy 6 September 2011Current EnvironmentEuropean CDS 1600 1400 1200 1000 800 600 ◄ Portugal, Ireland & 400 Greece CDS Basket 200 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11Source: Bloomberg and UBSNote: European CDS basket is the 5-day moving average of Portugal, Ireland and Greece CDS.Euribor–OIS Swap Spread 250 bps Pressure on European 200 financial system is increasing 150 100 50 0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11Source: Bloomberg and UBS UBS 9
  10. 10. US Equity Strategy 6 September 2011Current EnvironmentU.S. Economic Surprise Index 3 > 0 represents Positive Surprise 2 Economic surprises have improved as expectations have come down 1 0 -1 -2 -3 < 0 represents Negative Surprise -4 06 07 08 09 10 11Source: Bloomberg and UBS Global Economics Team3Q11 GDP Forecasts vs. S&P 500 EPS Estimates 4.0 % $ 26.0 Consensus 3Q GDP and S&P 3.5 500 earnings estimates have 25.5 fallen ◄ 3Q11 GDP Est 3.0 25.0 2.5 24.5 2.0 3Q11 EPS Est ► 1.5 24.0 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11Source: Bloomberg, Thomson Financial, FactSet and UBS UBS 10
  11. 11. US Equity Strategy 6 September 2011Past RecessionsPast Market Declines Subsequent Returns Peak Date Trough Date Return 4 Months 1 Year The market has predicted 14S&P 500 Declines of More Than 17% Followed By Recession of the past 9 recessions Jun-48 Jun-49 -20.3 17.9 42.1 Aug-56 Oct-57 -21.6 4.9 31.0 Nov-68 May-70 -36.1 21.2 43.7 In the 5 instances where a Jan-73 Oct-74 -48.2 25.0 38.0 17% market decline was not Feb-80 Mar-80 -17.1 23.0 37.1 Nov-80 Aug-82 -27.1 36.3 58.3 followed by a recession, Jul-90 Oct-90 -19.9 24.7 29.1 stocks rebounded 15% in Mar-00 Oct-02 -49.1 6.8 33.7 four months and 28% in one Oct-07 Mar-09 -56.8 30.5 68.6 yearAverage 15 mths -32.9 21.1 42.4S&P 500 Declines of More Than 17% Not Followed By Recession Dec-61 Jun-62 -28.0 4.2 32.7 Feb-66 Oct-66 -22.2 18.8 32.9 Sep-76 Mar-78 -19.0 8.6 14.0 Aug-87 Dec-87 -33.5 14.4 21.4 Jul-98 Aug-98 -19.3 28.4 37.9Average 7 mths -24.4 14.9 27.8S&P 500 Declines of Less Than 17% Followed By Recession Jan-53 Sep-53 -14.8 10.9 37.7 Aug-59 Oct-60 -13.9 20.2 30.7Current Fall Apr-11 Aug-11 -17.9Source: S&P, Haver and UBS.EPS Declines in Recessions Quarter EPS EPS Change Year Peak Trough Peak Trough % The market has predicted 14 of the past 9 recessions 1970 3Q69 4Q70 5.89 5.13 -12.9 1974-75 3Q74 3Q75 9.11 7.65 -16.0 1981-82 4Q81 1Q83 15.36 12.42 -19.1 1990-91 3Q90 4Q91 23.8 20.34 -14.5 2000-01 3Q00 1Q02 56.71 44.19 -22.1 2008-09 4Q07 3Q09 93.41* 60.14* -35.6 Average 5.3 qtrs -20.1Source: S&P, Thomson Financial, FactSet and UBSNote: 2008-09 EPS of $93.41 and $60.14 adds back $8.85 and $9.30, respectively, to account for extraordinarywrite-offs taken by the Financials sector. UBS 11
  12. 12. US Equity Strategy 6 September 2011Revenues & MarginsS&P 500 Revenues vs. Nominal GDP 18% Y/Y Y/Y 8% ◄ Revenues Revenues for the S&P 500 are driven by nominal GDP 12% GDP ► 6% but are 3–4x more volatile 6% 4% 0% 2% Revenues have held up well -6% Sectors Multiplier despite weak GDP Energy 6.8 0% -12% Materials 3.4 Technology 2.9 Discretionary 2.7 -2% -18% Industrials 2.1 -24% -4% 00 01 02 03 04 05 06 07 08 09 10 11Source: BEA, S&P, Compustat, FactSet and UBS Note: Universe excludes Financials. Data as of 2Q11Operating Margins vs. Capacity Utilization (Mfg) 82 15.0% 15% 14.8% Margins have surpassed last Capacity 78 cycle’s peak Utilization ► 75.0% 13% 74 70 11% ◄ S&P 500 (ex-Finl.) 66 Operating Margins 9.8% 9% 62 00 01 02 03 04 05 06 07 08 09 10 11Source: S&P, Compustat, FactSet and UBS Note: Universe excludes Financials. Data as of 2Q11 UBS 12
  13. 13. US Equity Strategy 6 September 2011MarginsOperating Margins vs. CRB Raw Industrials 15% 600 In the last cycle, margins 14% continued to rise despite elevated input costs 13% 500 ◄ Margins 12% 400 CRB Raw 11% Industrials ► 300 10% 9% 200 00 01 02 03 04 05 06 07 08 09 10 11Source: S&P, Compustat, Wall Street Journal, FactSet and UBSNote: Universe excludes Financials. Data as of 2Q11Unit Labor Cost 12 Labor costs are on the rise 9 6 2.1 Avg: 3.8 3 0 Avg: 1.7 -3 50 55 60 65 70 75 80 85 90 95 00 05 10Source: Department of Labor, FactSet and UBS UBS 13
  14. 14. US Equity Strategy 6 September 2011MarginsLarge-cap vs. Small-cap EBIT Margins 15.0% 10% 15% 14.8% 9.4% 9% Small-cap margins remain Small-cap ► substantially below their 14% 8% large-cap counterparts’ 7.2% 13% 7% 12% 6% 5% 11% 4% ◄ Large-cap 10% 3% 9% 2% 99 00 01 02 03 04 05 06 07 08 09 10 11Source: S&P, Compustat, FactSet and UBS Note: Universe excludes Financials. Data as of 2Q11Large/Small-Cap EBIT Margin Spread 8% 7.8% The margin differential points 7% to greater opportunity in the small-cap world 6% 5% 4% 3% 00 01 02 03 04 05 06 07 08 09 10 11Source: S&P, Compustat, FactSet and UBS Note: Universe excludes Financials. Data as of 2Q11 UBS 14
  15. 15. US Equity Strategy 6 September 2011Current & Peak Operating Margins Current Last Prior 2Q11E 1Q11A 4Q10A 3Q10A 2Q10A 1Q10A Peak MarginCyclicals Technology 22.3% 22.3% 23.2% 22.0% 21.4% 20.3% 4Q10 23.2% Software 28.0 27.0 29.2 27.4 26.7 25.0 4Q09 31.9 Hardware 17.5 17.4 17.0 16.1 15.1 15.2 4Q09 17.6 Semis & Equipment 24.6 26.8 28.3 29.1 28.4 25.5 1Q00 34.9 Industrials 14.5 15.0 15.8 14.0 14.5 12.7 2Q07 16.8 Capital Goods 14.4 15.6 16.2 13.8 14.5 12.9 2Q07 17.0 Commercial Svcs 14.1 13.0 14.8 14.5 14.3 13.5 3Q00 17.7 Transportation 15.0 12.3 14.3 15.2 14.2 11.6 2Q06 16.5 Cons Discretionary 12.1 11.3 11.3 11.4 11.7 11.3 2Q11 12.1 Autos 9.4 10.1 5.1 10.0 11.1 10.5 2Q09 11.6 Durables & Apparel 10.7 9.9 11.1 11.1 10.0 10.7 4Q05 13.7 Consumer Svcs 18.3 20.1 17.1 21.0 17.5 19.6 3Q10 21.0 Media 21.1 17.7 19.4 18.6 19.4 17.6 2Q03 22.3 Retailing 7.6 7.2 8.5 6.7 7.7 7.4 4Q03 9.5 Materials 17.0 17.0 13.5 13.3 14.1 13.7 1Q11 17.0 Energy 16.7 16.0 15.0 14.3 14.9 15.3 3Q08 22.1Non-Cyclicals Health Care 13.9 14.4 12.4 13.8 14.0 13.8 2Q00 18.6 Healthcare Svcs 7.3 7.6 6.6 7.0 7.0 7.2 3Q07 7.8 Phama & Biotech 29.0 30.3 25.0 29.7 29.7 29.3 2Q03 34.1 Consumer Staples 10.0 9.3 10.0 10.3 10.1 9.7 2Q05 11.8 Food Retailing 5.1 4.8 5.6 4.7 5.1 5.0 2Q05 7.3 Food, Bev & Tob 16.7 15.9 15.7 18.5 18.4 16.7 2Q01 19.8 Household Prod 16.3 17.7 19.2 20.0 15.8 19.1 4Q03 26.8 Telecom Svcs 17.0 16.9 18.6 17.0 18.4 17.8 3Q00 27.8 Utilities 19.0 19.2 15.6 22.2 19.2 19.3 3Q09 23.7S&P 500 S&P 500 (ex-Finl.) 15.0 14.7 14.3 14.4 14.3 13.9 2Q11 15.0Source: Standard & Poor’s, Compustat, Thomson Financial, FactSet and UBS UBS 15
  16. 16. US Equity Strategy 6 September 2011ValuationDow Jones Industrials — Super Cycle Log Scale 10,000 all Equities experience 5,000 or prolonged booms or periods 4,000 of anemic returns 3,000 nothing 2,000 1,000 500 These “investment regimes” 400 300 hold the key to stock prices 200 100 50 40 10 20 30 40 50 60 70 80 90 00 10Source: Dow Jones, FactSet and UBSS&P 500 E/P vs. Baa Yields (Millennium Regime) P/E Anchored to Slower Recession The forward consensus P/E Fears is 10.9x. The bond market is 10 Baa Bond Yields Growth implying 18.2x P0 pr pr1 9 = 1 = E1 k − g (i + rrf + erp) − g 8 Earnings Yield ► 7 6 ▲ Baa Yield 5 04 05 06 07 08 09 10 11Source: Moody’s, Standard & Poor’s, Thomson Financial, FactSet and UBS UBS 16
  17. 17. US Equity Strategy 6 September 2011ValuationS&P 500 E/P vs. 10 Yr Treasuries(Great Moderation/The Fed Model) 16 During the “Great ◄ Earnings Yield Moderation”, the “Fed 14 Model” explained returns 12 10 8 6 10-year Yield ▲ 4 82 84 86 88 90 92 94 96 98Source: Federal Reserve, Standard & Poor’s, Thomson Financial, FactSet and UBSS&P 500 E/P vs. 10 Yr Treasuries 10 However, since 2000, this Earnings Yield ► relationship has broken 8 down 6 4 10-year Yield ▲ 2 00 02 04 06 08 10Source: Federal Reserve, Standard & Poor’s, Thomson Financial, FactSet and UBS UBS 17
  18. 18. US Equity Strategy 6 September 2011ValuationS&P 500 E/P vs. Inflation (Disco Regime) 16 In the 1970s “Disco Regime”, 14 inflation was the primary driver of stock values Earnings Yield ▼ 12 Inflation ► 10 8 6 4 72 74 76 78 80Source: Standard & Poor’s, Dept. of Labor, Thomson Financial, FactSet and UBSNote: Earnings Yield based on trailing earnings; CPI (+2%) is lagged by 3 monthsThe Disco Regime (1981 – Present) Falling inflation since the late ’70s has made CPI less 15 important to valuations 12 9 Earnings Yield ► 6 3 ▲ Inflation 85 90 95 00 05 10Source: Standard & Poor’s, Dept. of Labor, Thomson Financial, FactSet and UBSNote: Earnings Yield based on trailing earnings; CPI (+2%) is lagged by 3 months UBS 18
  19. 19. US Equity Strategy 6 September 2011ValuationNTM P/E – Cyclicals vs. Non-Cyclicals 16 Cyclical stocks appear 15 attractively valued vs. more defensive names 14 ◄ Cyclicals 13 12.6x 12 ◄ Non-Cyclicals 11 10.9x 10 Mar-09 Aug-09 Jan-10 Jun-10 Nov-10 Apr-11Source: Standard & Poor’s, Compustat, Thomson Financial, FactSet and UBSNote: Cyclicals are comprised of Energy, Materials, Industrials, Consumer Discretionary, Financials and Technologywhile Non-Cyclicals include Consumer Staples, Health Care, Telecom and UtilitiesChange in NTM P/E Forward P/E % Chg — Apr 29 to Now Apr 29 Now Change Price NTM EPSCyclicals The recent shift in multiples Industrials 15.2 11.8 -3.4 -17.0 7.0 is the result of both price and EPS changes Materials 13.8 11.1 -2.7 -13.1 8.1 Energy 12.1 9.6 -2.5 -16.5 4.9 Financials 11.8 9.6 -2.2 -17.5 1.6 Technology 13.2 11.3 -1.9 -9.4 5.9 Discretionary 15.5 13.7 -1.8 -8.5 3.8Non-Cyclicals Health Care 12.2 11.1 -1.1 -6.2 3.5 Telecom 16.8 15.5 -1.3 -7.7 0.1 Staples 14.5 13.8 -0.7 -2.4 2.7 Utilities 13.3 13.5 0.2 1.6 0.3Source: Standard & Poor’s, Compustat, Thomson Financial, FactSet and UBS UBS 19
  20. 20. US Equity Strategy 6 September 2011Inter-Sector Relative ValuationsRelative Valuation – Overvalued/Undervalued Overvalued 2.8 2.3 On a relative basis, Utilities & Telecoms look the most 1.5 overvalued; Materials & Tech P/E Multiple Points 1.3 the cheapest 0.3 -0.7 -0.7 -0.7 -1.0 Undervalued -2.1 MAT TECH FIN IND EN DISCR HC STPLS TCOM UTIL Cyclicals Non-CyclicalsSource: Standard & Poor’s, Compustat, Thomson Financial, FactSet and UBSNote: Analysis performed on a 36-month rolling basisEnergy vs. Materials 3.3 4.6 Overvalued Materials appear cheap 2.3 3.4 versus Energy 1.3 ◄ Energy 2.1 P/E Multiple Points 0.3 0.8 -0.7 -0.4 -1.7 -1.7 Materials ► -2.7 -3.0 Undervalued -3.7 -4.2 97 99 01 03 05 07 09Source: First Call, Standard & Poor’s, FactSet and UBS Note: Analysis performed on a 36-month rolling basis UBS 20
  21. 21. US Equity Strategy 6 September 2011Inter-Sector Relative ValuationsIndustrials vs. Technology 2.6 2.2 Overvalued Industrials valuations have 1.6 1.3 come down sharply P/E Multiple Points 0.6 0.4 Tech trades in line with the -0.4 -0.5 broad market Technology ► ◄ Industrials -1.4 -1.4 Undervalued -2.4 -2.3 97 99 01 03 05 07 09Source: First Call, Standard & Poor’s, FactSet and UBS Note: Analysis performed on a 36-month rolling basisConsumer Discretionary vs. Financials 1.8 2.1 Overvalued Discretionary is the most ◄ Discretionary overvalued of the cyclical Financials ► sectors P/E Multiple Points 0.8 0.8 -0.2 -0.6 Undervalued -1.2 -2.0 See Appendix for inter-sector 97 99 01 03 05 07 09 valuation methodologySource: First Call, Standard & Poor’s, FactSet and UBS Note: Analysis performed on a 36-month rolling basis UBS 21
  22. 22. US Equity Strategy 6 September 2011Inter-Sector Relative ValuationsTelecommunication Services vs. Utilities 3.1 Overvalued 3.9 Telecom and Utilities look 2.1 2.7 extremely expensive ◄ Telecom P/E Multiple Points 1.1 1.4 0.1 0.2 -0.9 -1.1 -1.9 -2.3 Utilities ► Undervalued -2.9 -3.6 97 99 01 03 05 07 09Source: First Call, Standard & Poor’s, FactSet and UBS Note: Analysis performed on a 36-month rolling basisHealth Care vs. Consumer Staples 2.0 2.4 Overvalued While expensive, Health Care and Staples are much more 1.0 ◄ Health Care Staples ► 1.4 attractively valued than Utilities or Telecom P/E Multiple Points 0.0 0.4 -1.0 -0.6 -2.0 -1.5 Undervalued -3.0 -2.5 97 99 01 03 05 07 09Source: First Call, Standard & Poor’s, FactSet and UBS Note: Analysis performed on a 36-month rolling basis UBS 22
  23. 23. US Equity Strategy 6 September 2011Market LeadershipUBS Market Leadership Framework I. Early Phase II. Middle Phase III. Late Phase Different investment characteristics are rewarded at each stage of the Earnings Fundamentals investment cycle Op Leverage Valuation Volatility Quality Cyclicals Non-CyclicalsSource: UBSS&P 500 vs. Cyclical Outperformance 1675 Early Middle Late Current 140 Cyclicals typically 1475 Cycl. vs. 130 outperform in the early stage Non-Cycl. ► and during periods of 1275 120 economic strength 1075 ▲ S&P 500 110 875 100 675 90 475 80 02 03 04 05 06 07 08 09 10Source: Standard & Poor’s, Haver, FactSet and UBSNote: Cyclical Outperformance indexed to 100 as of Jan, 1990 UBS 23
  24. 24. US Equity Strategy 6 September 2011Market Leadership — Return DriversPrice Volatility & Operating Leverage 4% 3-Month Moving Avg ◄ Op Levg Similar to 2010’s mid-year slowdown, early-cycle 2% characteristics have rolled over 0% -2% ◄ Price Vol -4% Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11Source: Standard & Poor’s, Compustat, Thomson Financial, Worldscope, FactSet and UBSROE 3% 3-Month Moving Avg At the same time, defensive 2% traits are adding value 1% 0% We expect these trends to reverse -1% ROE ► -2% -3% -4% Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11Source: Standard & Poor’s, Compustat, Thomson Financial, Worldscope, FactSet and UBS UBS 24
  25. 25. US Equity Strategy 6 September 2011Market Leadership — Return DriversOp Lev Return Index vs. Op Margins S&P 500 (ex- Finl.) 15% 110 Operating Margins ► Operating Leverage is highly 14% correlated with margin upside 106 13% 12% 102 11% ◄ Op. Leverage 98 Return Driver Index 10% 94 9% 00 02 04 06 08 10Source: Standard & Poor’s, Compustat, Thomson Financial, Worldscope, FactSet and UBSVolatility Return Driver in Up S&P 500 Months 20 Performance in Up SPX Months Avg: 1.9% More volatile stocks should Max: 17.5% benefit the most from a 15 Min:-2.7% market rebound Months Outperforming: 56 of 77 10 5 0 See Appendix for calculation -5 methodology on UBS Return 1 7 13 19 25 31 37 43 49 55 61 67 73 DriversSource: Standard & Poor’s, Compustat, Thomson Financial, Worldscope, FactSet and UBS UBS 25
  26. 26. US Equity Strategy 6 September 2011Market Leadership — Return DriversForeign Sales Return Index 135 Foreign Sales has added 130 considerable alpha over time… 125 120 …but has detracted value more recently 115 110 1.2% avg alpha per year 105 100 90 92 94 96 98 00 02 04 06 08 10Source: Standard & Poor’s, Compustat, Thomson Financial, Worldscope, FactSet and UBSForeign Sales – Industry Group Breakdown Foreign Sales Foreign Sales Exposure ExposureCyclicals Non-CyclicalsInformation Tech 55.5 Consumer Staples 26.6 Software & Services 44.1 Food & Staples Retail 15.9 Hardware 56.1 Food Bev. & Tobacco 40.8 Semiconductors 84.9 Household Products 54.6Energy 48.7 Health Care 18.2 Equip. & Services 5.0Materials 45.5 Pharma/Biotech 47.9Industrials 37.3 Utilities 5.2 Capital Goods 41.4 Services 22.6 Telecom 0.1 Transportation 16.0Consumer Cyclicals 24.9 S&P 500 Index 29.7 Autos 53.6 Durables & Apparel 34.1 Consumer Services 43.0 Media 20.6 Retailing 12.9Financials 17.0 Banks 0.0 Diversified Financials 22.7 Insurance 17.2 Real Estate 12.9Source: Standard & Poor’s, Compustat, Thomson Financial, Worldscope, FactSet and UBS UBS 26
  27. 27. US Equity Strategy 6 September 2011Earnings Analysis2Q11 Earnings Scorecard Earnings Growth Earnings Surprise Rptd Total YoY (% ) Pos Neg Pct (% ) Beat MissCyclicals ex-Finls 282 284 24.7 230 48 6.0 212 57 Stocks beat 2Q expectations Cons. Discretionary 78 79 10.8 60 18 7.3 64 11 by 5% Energy 41 41 41.3 35 5 2.1 29 11 Industrials 59 60 18.2 52 6 3.5 42 14 Materials 30 30 49.7 27 3 3.5 18 9 Technology 74 74 20.4 56 16 10.7 59 12 74% of companies have beaten on the bottom-lineNon-Cyclicals 132 134 6.9 96 33 3.3 90 30 Cons. Staples 39 41 9.6 30 7 2.6 30 6 Health Care 52 52 5.2 44 8 4.0 37 7 Telecom 8 8 -0.1 3 5 -7.0 4 4 Utilities 33 33 10.8 19 13 11.4 19 13S&P 500 ex-Finls 414 418 18.3 326 81 5.1 302 87 Financials 81 82 10.8 60 19 6.2 62 15S&P 500 495 500 17.0 386 100 5.3 364 102Source: Standard & Poor’s, Compustat, Thomson Financial, FactSet and UBS2Q11 Revenue Scorecard Revenue Growth Revenue Surprise Rptd Total YoY (% ) Pos Neg Pct (% ) Beat MissCyclicals ex-Finls 282 284 18.3 246 36 3.4 188 57 65% of companies (ex- Cons. Discretionary 78 79 11.3 65 13 3.2 53 13 financials) have delivered Energy 41 41 38.2 39 2 5.6 30 9 positive revenue surprises Industrials 59 60 8.4 52 7 1.2 36 15 Materials 30 30 17.8 29 1 2.6 19 7 Technology 74 74 12.8 61 13 2.9 50 13Non-Cyclicals 132 134 7.8 110 21 1.4 79 33 Cons. Staples 39 41 9.1 33 6 1.8 25 9 Health Care 52 52 6.4 46 6 1.6 35 7 Telecom 8 8 7.9 8 0 0.4 3 3 Utilities 33 33 7.0 23 9 -0.6 16 14S&P 500 ex-Finls 414 418 14.1 356 57 2.6 267 90 Financials 81 82 7.4 61 18 4.6 55 13S&P 500 495 500 13.2 417 75 2.9 322 103Source: Standard & Poor’s, Compustat, Thomson Financial, FactSet and UBS UBS 27
  28. 28. US Equity Strategy 6 September 2011Earnings AnalysisS&P 500 Earnings Surprise 11.5 9.9 EPS has beaten expectations 8.9 in each of the past 9 quarters 8.0 7.0 6.2 5.9 5.2 5.1 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11ESource: Standard & Poor’s, Compustat, Thomson Financial, FactSet and UBSNote: Universe excludes FinancialsS&P 500 Revenue Surprise 2.6 2.3 Revenues are coming in much stronger than expected 1.4 1.0 0.4 0.5 0.4 -0.9 -0.1 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11ESource: Standard & Poor’s, Compustat, Thomson Financial, FactSet and UBSNote: Universe excludes Financials UBS 28
  29. 29. US Equity Strategy 6 September 2011Earnings AnalysisEarnings Surprise – Cyclicals vs. Non-cyclicals 15 14 Earnings surprises have been stronger for Cyclicals vs. Non-cyclicals 12 Cyclicals 10 9 Non-Cyclicals 8 7 7 6 6 6 5 5 4 4 3 3 3 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11ESource: Standard & Poor’s, Compustat, Thomson Financial, FactSet and UBSNote: Universe excludes Financials2011 EPS Revisions since 06/30/11 1.0 0.3 0.1 -0.4 -0.4 -1.0 -10.2 Earnings revisions have been negative for Financials and the commodity sectors Tech Non- Indls Matr Cons Energy Finls Cycls DiscSource: Standard & Poor’s, Compustat, Thomson Financial, FactSet and UBS UBS 29
  30. 30. US Equity Strategy 6 September 2011Earnings Analysis2Q11 Price Response to Surprises 2Q11 1Q11 Revenue Surprise Revenue Surprise Only companies beating on Beat Miss Beat Miss both the top- and bottom- lines are being rewarded EPS Surprise EPS Surprise Beat Beat 0.86 -0.24 0.55 0.79 -0.60 0.30 Miss Miss -2.84 -4.64 -3.89 -1.46 -2.54 -2.04 0.27 -2.24 0.20 -1.29Source: S&P, Compustat, Thomson Financial, FactSet and UBS.Note: Price action for above table is calculated for all companies reported 2Q results from 1 day before to 1 day afterreport date. For history shown in table below, price action is calculated from 1 day before to 2 days after report dateHistorical Price Response to Surprises Price Action (%) Beat EPS Beat EPS Miss EPS Miss EPS Quarter Beat Sales Miss Sales Beat Sales Miss Sales Companies beating on both 1Q11 0.69 -0.21 -1.42 -2.63 top- and bottom-lines 4Q10 1.61 -0.67 -1.23 -2.89 3Q10 1.00 -0.70 -2.87 -1.39 consistently outperform 2Q10 1.10 -1.57 -2.64 -3.79 1Q10 0.62 -0.63 -2.62 -3.53 4Q09 1.16 0.01 -3.07 -3.08 3Q09 0.87 -0.60 -2.79 -4.63 2Q09 1.58 -0.12 -1.51 -4.90 1Q09 4.91 1.68 -1.05 -3.21 4Q08 4.79 0.67 -2.04 -3.97 3Q08 2.33 -1.47 -2.15 -4.40 2Q08 1.91 0.39 -5.19 -5.36 1Q08 1.73 -0.27 -2.54 -4.07 4Q07 2.37 -0.09 -0.98 -5.47 3Q07 1.47 0.27 -0.90 -3.70 2Q07 1.59 -0.68 -2.77 -3.11 1Q07 1.69 -0.96 -1.57 -3.38 4Q06 1.48 0.69 -0.84 -2.60 3Q06 1.79 -0.28 -1.15 -3.48 2Q06 1.39 0.41 -4.55 -4.86 1Q06 1.01 0.85 -2.15 -4.13 4Q05 1.48 -0.22 -1.28 -3.77 3Q05 1.39 0.35 -2.44 -2.65 2Q05 2.01 0.23 -0.71 -2.89 1Q05 1.64 -0.34 -1.23 -4.83 4Q04 1.00 -0.62 -2.80 -3.48 3Q04 1.56 1.37 -0.13 -1.50 2Q04 1.48 -0.59 -1.47 -4.29 1Q04 0.98 0.80 -1.82 -3.26Source: Standard & Poor’s, Compustat, Thomson Financial, FactSet and UBS UBS 30
  31. 31. US Equity Strategy 6 September 2011Earnings Analysis2Q11 Serial Correlation of Revenue Surprises Revenue Surprise Rptd Total Pct (% ) Beat Miss Revenue surprises are serially correlated 1Q11 High Rev. Surprise 207 209 3.9 158 33 1Q11 Low Rev. Surprise 207 209 1.8 109 57Difference 2.1 49 -24Source: S&P, Compustat, Thomson Financial, FactSet and UBSSerial Correlation of EPS/Rev Surprises % of Prior Sales % of Overall Quarter & EPS Beats S&P 500 Difference 1Q11 62% 52% 10% Companies beating on both 4Q10 63% 50% 13% top- and bottom-lines tend to 3Q10 56% 48% 8% repeat 2Q10 66% 53% 13% 1Q10 69% 60% 9% 4Q09 73% 59% 14% 3Q09 68% 50% 18% 2Q09 54% 37% 17% 1Q09 41% 28% 13% 4Q08 31% 30% 1% 3Q08 46% 39% 7% 2Q08 68% 59% 9% 1Q08 61% 52% 9% 4Q07 67% 57% 10% 3Q07 62% 49% 13% 2Q07 58% 54% 4% 1Q07 64% 54% 10% 4Q06 55% 49% 6% 3Q06 61% 52% 9% 2Q06 60% 49% 11% 1Q06 56% 48% 8% 4Q05 55% 49% 6% 3Q05 47% 43% 4% 2Q05 71% 60% 11% 1Q05 55% 51% 4% 4Q04 64% 58% 6% 3Q04 60% 53% 7% 2Q04 63% 58% 5% 1Q04 76% 69% 7%Source: Standard & Poor’s, Compustat, Thomson Financial, FactSet and UBS UBS 31
  32. 32. US Equity Strategy 6 September 2011Sector ReturnsS&P 500 SectorsIndex Aug-11 QTD YTD 1 Yr 3 Yr 5 Yr 7 Yr 10 Yr Technology (6.0) (4.5) (2.5) 20.5 4.0 4.9 5.7 2.6 Financials (9.6) (12.8) (15.5) 0.0 (12.7) (14.7) (8.2) (4.3) Energy (9.7) (9.1) 1.3 34.4 (1.0) 5.6 12.3 11.0 Health Care (2.1) (5.9) 7.3 21.2 2.9 2.4 3.7 2.0 Consumer Staples 0.6 (0.9) 6.9 20.1 6.5 7.0 7.7 6.4 Consumer Discret. (5.3) (6.6) 1.2 26.6 9.1 4.4 4.6 3.7 Industrials (6.5) (13.0) (6.0) 17.1 (1.2) 1.3 3.4 2.8 Utilities 2.3 1.4 10.5 15.0 1.0 3.5 8.5 3.9 Materials (6.7) (9.8) (6.5) 19.9 (0.8) 4.7 6.7 7.5 Telecom Svcs. (1.4) (7.0) (0.4) 15.6 3.6 2.6 5.2 0.4S&P 500 (5.4) (7.4) (1.8) 18.5 0.5 0.8 3.5 2.7Index Weight 2010 2009 2008 2007 2006 2005 2004 Technology 18.6 10.2 61.7 (43.1) 16.3 8.4 1.0 2.6 Financials 14.2 12.1 17.2 (55.3) (18.6) 19.2 6.5 10.9 Energy 12.4 20.5 13.8 (34.9) 34.4 24.2 31.4 31.5 Health Care 11.8 2.9 19.7 (22.8) 7.2 7.5 6.5 1.7 Consumer Staples 11.3 14.1 14.9 (15.4) 14.2 14.4 3.6 8.2 Consumer Discret. 10.7 27.7 41.3 (33.5) (13.2) 18.6 (6.4) 13.2 Industrials 10.5 26.7 20.9 (39.9) 12.0 13.3 2.3 18.0 Utilities 3.7 5.5 11.9 (29.0) 19.4 21.0 16.8 24.3 Materials 3.6 22.2 48.6 (45.7) 22.5 18.6 4.4 13.2 Telecom Svcs. 3.1 19.0 8.9 (30.5) 11.9 36.8 (5.6) 19.9S&P 500 100.0 15.1 26.5 (37.0) 5.5 15.8 4.9 10.9Source: Standard & Poor’s, FactSet and UBS Note: All returns include dividends. UBS 32

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