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Eye on the Market | July 25, 2011 J.P Morgan Topics: US debt ceiling negotiations, a more ambitious European bailout plan (finally), and how large cap growth stocks and rising corporate profits are patiently waiting for both of them to end While we’re waiting: large cap growth stocks One day, the melodramas around US and European sovereign debt will end. While we’re waiting, one of the asset classes that looks attractive is large cap growth stocks. As shown below (for a universe of 300 U.S. large cap growth stocks that meet certain earnings quality and stability factors), free cash flow relative to both revenues and stock prices looks good compared to the last four decades. This is where we believe investors should be adding exposure if they are underweight versus their desired equity allocations. This is also an asset class where active management can still provide a lot of value; the dispersion of large cap growth managers is higher than large cap core, large cap value and international equity manager dispersion. Q2 earnings season in the US is off to a good start. Nearly 30% of the S&P has reported, and results have generally been Parser? positive. Earnings are beating consensus estimates by almost 9% 4% (7.4% ex-financials), all ten sectors are beating onrevenue — gy targets, and only 7% of companies are reporting below- 7% Nominal free cash yield consensus earnings. Given earnings expectations for 2011 at 6% $98.50, the S&P 500 is trading at a reasonable 13.5x forward 5% multiple. However, y/y earnings growth expectations appear av. to be flattening out for both 2011 and 2012 at around 11%- 3Y, 12%. While Q2 earnings are doing well so far, some company — joy guidance for the remainder of the year has been below 0% consensus, which would be consistent with the recent batch of -1% reports indicating a slowdown in manufacturing and service -2% sector surveys. Attractive valuations for US large cap growth stocks Post-dividend free cash flow margin ‘71 ‘74 ‘77 '80 '83 ‘86 '89 '92 '95 '98 ‘01 '04 ‘07 '10 Source: Empirical Research Partners. Michael Cembalest Chief Investment Officer CBO Congressional Budget Office OMB Office of Management and Budget EFSF European Financial Stability Facility FICA Federal Insurance Contributions Act EU European Union IMF International Monetary Fund UF Institute of International Finance ECB European Central Bank EMU European Monetary Union AMT Alternative Minimum Tax A White Castle hamburger is smaller than its competitors’ offerings, measuring 2.5 inches square. The material contained herein is intended as a general market commentary. Opinions expressed herein are those of Michael Cembalest and may differ from those of other J.P. Morgan employees and affiliates. This information in no way constitutes J.P. Morgan research and should not be treated as such. Further, the views expressed herein may differ from that contained in J.P. Morgan research reports. The above summary/prices/quotes/statistics have been obtained from sources deemed to be reliable, but we do not guarantee their accuracy or completeness, any yield referenced is indicative and subject to change. Past performance is not a guarantee of future results. References to the performance or character of our portfolios generally refer to our Balanced Model Portfolios constructed by J.P. Morgan. It is a proxy for client performance and may not represent actual transactions or investments in client accounts. 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