An analysis of post Q3 2015 earnings season, current market valuations and the outlook for corporate earnings in 2016.

1. Market Perspectives – November 2015
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Overview: With third quarter earnings season nearly complete, and a market
rally having erased much of late summer correction, valuations once again
stand close to relative market highs. In this month’s Market Perspectives, we
not only offer an update on corporate earnings growth, but also scrutinize the
expected earnings growth rate in 2016 and compare it to current market
valuations. This will serve as a guide for investment strategy.
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2. Experience Insight Impact
What Sort of Earnings Growth Have We Seen?
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• With 3rd quarter earnings
reports almost complete, S&P
500 earnings declined 4.69%
year over year.
• As shown, Energy and Materials
sectors have been impacted by
significantly lower global
commodity prices, and this
continues to negatively impact
S&P earnings growth. The
Financial sector is still battling
lower global interest rates.
• However, Industrials, Consumer
Staples, and Utilities earnings
have also turned negative.
Instead of a few struggling
sectors, half of the S&P sectors
are experiencing declining
earnings.Source: Bloomberg

3. Experience Insight Impact
How Are Companies Performing Excluding The Energy Sector?
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• This chart shows the overall
S&P 500 earnings growth
excluding the Energy sector.
Even without the headwinds of
$50/bbl oil, the remaining S&P
500 companies are still only
generating an anemic +2.0%
growth rate.
• Slower earnings growth ex-
Energy confirms there are
other issues at play. For
example, companies are citing
the strong dollar hurting
exports. Also, manufacturing
sectors are fighting against
high inventory levels due to
slower global demand.
Source: Bloomberg

4. Experience Insight Impact
What Does the Market Expect for the Future?
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• This chart shows both the historical and
estimated quarterly earnings growth
over a two year period from Q3 2014 to
Q3 2016.
• Historical earnings growth is represented
on the left of the thin, vertical line and
future estimates for the next several
quarters are on right of the line. It
implies that analysts expect a v-shaped
recovery in earnings growth as we
progress into 2016.
• In fact, Q3 2016 S&P earnings are
estimated to reach approximately +10%,
a strong outlook despite global growth
concerns. It is worth noting that analysts
are typically overly optimistic and tend
to revise earnings downward as the year
progresses.
Source: Bloomberg

5. Experience Insight Impact
What Does the Market Expect Excluding Energy?
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• This chart again shows both the historical
and estimated quarterly earnings growth,
but here we exclude the Energy sector.
• Analysts’ expectations for higher earnings
growth in the second half of 2016 are not
driven by stable oil prices. As shown, the Q3
2016 S&P earnings growth ex-Energy are
also forecasted to grow by 10%. Thus,
factors other than oil are expected to push
market earnings higher.
• With challenges like a strong dollar and
slowing global demand at play, true organic
growth may prove difficult.
Source: Bloomberg

6. Experience Insight Impact
Where is the Growth Coming From?
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• Analysts’ expectations for double-digit growth
rates are primarily driven by the Consumer
Discretionary and Information Technology
sectors.
• Consumer Discretionary earnings are expected
to bounce in 2016 vs. 2015 due to lower energy
prices, an improving labor market, rising home
prices, and low inflation.
• A Tech earnings bounce is uncertain. According
to JP Morgan, after stripping out Apple and
Google, overall Tech revenues have been as
weak as the Industrials sector.
• Profit margin expansion may be increasingly
difficult. Margins are near all time highs, and
labor markets are tightening.
Note: A large increase is expected in Materials
but the sector is much smaller relative to others
and its impact is less significant.
Source: JP Morgan
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FY FY
2015E 2016E
Telecom Services 70% 8%
Health Care 17% 19%
Financials 8% 8%
S&P 500 ex-Energy 7% 13%
Consumer Discretionary 7% 14%
Industrials 7% 7%
Information Technology 6% 14%
Utilities 5% 2%
Consumer Staples -1% 7%
S&P 500 -3% 16%
Materials -29% 60%
Energy -91% 364%
EPS Y/Y Growth
S&P 500 Consensus Sector Growth Estimates

7. Experience Insight Impact
What Are These Companies Saying?
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• Corporate outlooks during this earnings season
don’t necessarily support a rapid earnings
recovery.
• This chart aggregates changes in companies’
earnings outlooks compared to analysts’
estimates. For example, if a management team
issues quarterly guidance higher than the
consensus estimates, it’s included in the
“Revised Up” row.
• S&P 500 companies have issued far more
neutral and declining estimates for this quarter
and Q1 earnings than positive revisions.
• We would expect Consumer and Tech company
outlooks to be more positive, however they
have been just as neutral and negative as the
broad market. These earnings revisions appear
inconsistent with the growth leadership
expected for these sectors.
Source: Bloomberg.
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Q4/15 Q1/16 2016 % of Total
Revised Up 13 4 8 13%
Revised Down 57 25 12 48%
Neutral 35 24 17 39%
Total: 105 53 37 100%
Revised Up 6 3 1 11%
Revised Down 32 16 2 53%
Neutral 23 8 4 37%
Total: 61 27 7 100%
Revised Up 17 12 4 16%
Revised Down 56 25 4 42%
Neutral 53 29 2 42%
Total: 126 66 10 100%
Total # of U.S. Companies Issuing Earnings Outlooks
Comparison of New Forecasts vs. Consensus Estimates
`------------U.S. Technology------------
`------------U.S. Consumer Discretionary------------
`------------S&P 500------------

8. Experience Insight Impact
P/E Multiples Are High Relative to Uncertain Expectations
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• The green line represents the
trailing 12 month S&P 500 P/E
multiple over the last five years.
As illustrated, multiples have
been expanding for almost five
years, and at 18.6x today, they
are only slightly below the five
year peak of 18.9x hit this past
June.
• The purple line shows the S&P
forward earnings. Contrary to
valuation multiples, they have
stagnated and declined slightly
over the past two years.
• It appears multiples have moved
far ahead of earnings. Investors
are depending on a v-shaped
recovery in earnings growth.
Source: Bloomberg

9. Conclusion
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Conclusion: The trend of rising earnings multiples continues despite concerns
that lower global demand is beginning to impact a broader segment of the
domestic economy. While questions remain as to whether or not slower or
negative growth in some sectors of the economy will spread, based on current
stock prices and valuations, market participants do not appear to be
concerned. We believe a more diversified portfolio with some measures of
downside protection remains appropriate.
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10. Opinions expressed in this commentary may change as conditions warrant and is for
informational purposes only. Information contained herein is not intended to be personal
investment advice for any specific person for any particular purpose. We utilize information
sources that we believe to be reliable but cannot guarantee the accuracy of those sources.
Past performance is no guarantee of future performance; investing involves risk and may
result in loss of capital. Consider seeking advice from a professional before implementing
any investing strategy.
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Disclaimer
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