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Chart 1: Sector EPS estimated impact from 20% rate 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Financials Discretionary Telecom Staples Industrials Health Care Energy Materials Info Tech Real Estate Source: BofAML US Equity & Quant Strategy, FactSet, S&P While the effective tax rate of the S&P 500 is generally about 28% (currently closer to 25% due to the recent commodity recession), we estimate that the tax rate for the S&P 500’s domestic operations is much higher at roughly 33% — although this includes state and local taxes. If all companies with tax rates above the proposed new tax rate of 20% were to drop to 20%, and no companies provisioned for US taxes on foreign profits, we estimate the domestic effective tax rate for the S&P 500 would fall in line with its foreign tax rate of roughly 19%. This would represent a 9ppt decrease in the current S&P 500 tax rate and a 12% increase in EPS. We show the sensitivity to S&P 500 EPS to different assumed tax rates in the chart below, but we reiterate that these estimates exaggerate the actual impact on profits, as a significant portion of these benefits would likely be passed on to consumers via lower prices. We assume that in aggregate, roughly half of the gains from the lower tax rate would be retained (i.e. half of the amounts shown in the sensitivity analysis in Chart 2). Table 5: Impact of 20% domestic corporate tax rate Chart 2: Benefit to 2018 S&P 500 EPS from lower tax rates Sector Current tax rate New tax rate Change 20% Discretionary 30% 19% -12ppt Staples 29% 20% -Oppt 15% Energy 41% 32% -9ppt Financials 33% 21% -1 ppt 10% Health Care 25% 16% -9ppt Industrials 32% 23% -9ppt 5% Info Tech 18% 14% -Appt Materials 28% 23% -5ppt 0% Real Estate 9% 1% -2ppt 15% 20% 25% Telecom 29% 20% -9ppt Utilities 39% 20% A2ppt New Corporate Tax Rate S&P 500 28% 19% -9ppt Source: BofAML US Equity & Quant Strategy, FactSet, S&P Estimated impact on 2018 EPS * Current tax rates may differ from other sources, as this analysis is based on companies’ 5-yr median fiscal year domestic and foreign tax data from annual filings. Source: BofAML US Equity & Quant Strategy Note: Our base case assumes that half of the benefit would be passed on to customers, competed away or offset by other changes to the tax code. Thus, we woulld expect the uplift to our EPS forecast to be roughly half the calculated benefit from simply lowering the corporate tax rate. The market is beginning to price in the benefits of tax cuts , but we may still be in the early days — note that potential beneficiaries of fiscal stimulus (i.e. infrastructure spending) have seen an 18% multiple re-rating but de minimis fundamental support, whereas potential beneficiaries of lower corporate tax rates have seen performance driven nearly equivalently by multiples and earnings. Bankof America Merrill Lynch Equity Strategy Focus Point | 29 January 2017 5 HOUSE_OVERSIGHT_023073