3.2% (i.e. the cost of borrowing). Stocks typically struggle when the cost of borrowing exceeds the nominal growth of the economy (see Exhibit 4). Second, the recent backup in interest rates was driven primarily by improving real growth expectations, not higher inflation. This distinction is critical, because higher rates in response to improving real growth tend to benefit earnings sufficiently to overcome the downward pressure they place on valuation multiples. Finally, it will take a number of years before higher rates meaningfully impact aggregate S&P 500 interest expense, considering 91% of S&P 500 debt is fixed-rate and only 13% matures over the next two years. Yields 6 5 = 5 3 3.9 = 4 S 3.2 2 3 | a a o = 1 0 Current Historical Since 1962 Adjusted for Today's Lower Equilibrium Rate* Yield at Which Stock Prices and Rates Become Negatively Correlated *Adjusts for the reduction of 1.25 percentage points in the long-run equilibrium nominal rate, in line with the shift in Federal Reserve projections since 2012. Source: Investment Strategy Group, Bloomberg. Low Probability of Recession We continue to maintain a low, 10%, probability of recession driven by: e The positive trend of leading economic indicators e Low levels of inflation e The continued slow but steady pace of Federal Reserve interest rate hikes. We believe that Federal Reserve Chairman Powell’s recent commentary indicates that the FOMC will continue to be driven by data and financial market conditions. Their stated goal is to extend this expansion “indefinitely.”' While the Federal Reserve dots point towards four more interest rate hikes by the end of 2019, we do not think that such hikes materially increase the odds of a recession in an economy that continues to grow at levels that are generally regarded as above trend growth in the US. e Recent steepening of the yield curve. We have highlighted two measures of the yield curve as sign-posts we watch as an early harbinger of a recession. Both have steep