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Exhibit 55: US Equity Fund Flows and Change in 10-Year Treasury Yield Bond returns can influence flows into equity funds. Percentage Points, YoY % of Assets, 3-Month Moving Average Change in 10-Year Yield 8 eo--- Equity Minus Bond Flows (Right) 5 1984 1989 1994 1999 2004 2009 2014 Data through December 31, 2016. Source: Investment Strategy Group, Bloomberg, ICI. Exhibit 56: The AAIl Bullish Investor Sentiment Lack of investor euphoria is a contrarian positive for stocks. % Bullish, 52-Week Average 60 55 20 1988 1993 1998 2003 2008 2013 Data through December 31, 2016. Source: Investment Strategy Group, Bloomberg, American Association of Individual Investors. Exhibit 57: Non-Dealer US Equity Index Futures Positioning There is scope for increased US equity positions. $bn 140 120 + 100 - 80 4 60 + 40 20 0 + -20 -49 4 -60 -80 2011 2012 2013 2014 2015 2016 Data through December 31, 2016. Source: Investment Strategy Group, CFTC, Goldman Sachs Securities Division Equity Strats Group. incipient uptick in bond outflows seen in late 2016 may persist, especially with “risk-free” Treasuries delivering a notable loss in the fourth quarter. Today’s visible lack of market euphoria represents another potential positive for stocks. Exhibit 56 shows the proportion of investors classifying themselves as “bullish” near its lowest level in decades. Meanwhile, non-dealer positions in US index futures stand well below the levels seen in 2013-14, providing scope for upside (see Exhibit 57). If bull markets “die on euphoria” as Sir John Templeton observed, then these measures argue we have not yet reached the apex. A rare technical analysis signal corroborates that view. As shown in Exhibit 58, the Coppock curve—an intermediate-length momentum signal— has generated only 17 buy signals over the past 71 years, but collectively they have provided attractive low-risk entry points for long-term investors. If we took the median path of S&P 500 prices after past signals, it would imply the market gains 9% this year with 88% odds of a positive outcome. Of particular note, Coppock buy signals on the NYSE, Russell 2000 and FTSE All-World Index were also triggered in November, even before the post-election rally. For all the reasons discussed above, we accord a 25% probability to our good-case scenario of the S&P 500 reaching 2,450 by year-end. Of course, we are equally aware of the myriad downside risks investors face, including growing unease about a disorderly backup in bond yields. But here, our work suggests that rates have scope to increase further before becoming a headwind for stocks, even if adjusted for today’s lower long-run equilibrium nominal rate (see Exhibit 59}. Keep in mind that 88% of S&P 500 debt has a fixed interest rate and only about 10% matures each year. The impact of higher rates will be spread over many years as a consequence. 54 | Goldman Sachs | JANUARY 2017 HOUSE_OVERSIGHT_014587