Capital Markets Summer 2020

II

Many Happy Returns? Lending vs. Owning

• Strong relationship between starting valuations and ensuing 10-year returns with current data suggesting equities will outperform bonds over the coming decade ‒ Note that low interest rates and stronger free cash flow generation imply higher multiples relative to history (see pages 26 & 27)

I

II

S&P 500 P/E vs. 10-Year Returns

Treasury Bond Yield vs. U.S. Aggregate Bond 10-Year Returns

12%

25%

= month

III

R² = 0.91

R² = 0.75

= current

10%

20%

8%

15%

6%

10%

IV

4%

5%

2%

0%

0%

V

-5%

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

Bloomberg Barclays U.S. Aggregate Bond 10-Year Annualized Return

5x

10x 15x 20x 25x 30x 35x

S&P 500 10-Year Annualized Return

S&P 500 LTM Price/Earnings

10-Year Treasury Bond Yield

Source: FactSet. Each dot represents the P/E during that month and the returns generated over the subsequent 10 years. The starting P/E ratio is the price divided by the last 12- month earnings per share estimate at the start of each 10-year period measured. Monthly data through June 2020, beginning in March 1990 for stocks and January 1986 for bonds. R-squared is a statistical measure used to analyze how differences in one variable can be explained by the difference in a second variable. The performance data quoted represents past performance, which is not an indication or a guarantee of future results.

VI

13