Must Read Research: High Bar for 2Q; Netflix; Heatwaves and Corn; US TSY Softening Demand

Earnings Season Outlook (Q2 2026)

• The S&P 500 delivered 27% EPS growth in Q1 2025, setting a high baseline for Q2 expectations.
• Civita "Supermanian" expects Q2 earnings to beat consensus by 5%, driven by 28% year-on-year EPS growth.
• Sector Growth Drivers
  • Technology is forecast to contribute over 50% of total growth.
  • Semiconductors are projected to grow by more than 130%.
  • Growth is anticipated in 10 of 11 sectors, including 121% growth in Energy and 30% in Materials.
• Early Results & Deviations
  • Initial beats are running above historical averages.
  • Large banks reported stronger-than-expected results.
  • United Healthcare posted a medical loss ratio beat.
  • J.B. Hunt highlighted accelerating intermodal trends.
  • IBM issued a surprise negative pre-announcement, triggering a record single-day share price decline of 25%.
• Key Watch List Factors
  • Signs of lower income recovery.
  • Hyperscaler Capital Expenditure (CapEx) trends.
  • Return on investment and earnings quality metrics for hyperscalers.

Netflix Engagement & Valuation Debate

• Netflix shares are down over 26% year-to-date and nearly 50% from their peak, including a 7% drop following Q2 results.
• Bearish Concerns
  • Investors question if engagement trends can support future growth.
  • Reports indicate declining viewing hours per subscriber.
  • Fears include M&A risks, AI-driven content disruption, and rising competition from YouTube/short-form platforms.
• Bullish Counterpoints
  • Management previously adapted successfully to slower growth via ad-supported tiers and password sharing monetization in 2022-2023.
  • Execution previously corrected overestimated margin concerns.
• Current Fundamentals
  • Platform reaches over 300 million global subscribers.
  • Company is generating significant free cash flow.
  • Significant monetization upside remains in advertising, live events, and password sharing.

Global Agriculture & Weather Risks

• Global temperatures have exceeded pre-industrial levels by more than 1°C annually for the past decade.
• The Northern Hemisphere, containing 84% of global grain production, is warming faster than the Southern Hemisphere.
• Regional Temperature Anomalies
  • Europe has risen 0.87°C over the past decade compared to 0.44°C globally.
  • France experienced two heat waves approaching 43°C (109°F).
  • Hungary is currently showing severe crop stress.
• Impact on Corn Supply
  • France produces one-fifth of European corn; losses there and in Hungary could cut EU production by ~10% year-over-year.
  • EU corn imports are projected to reach a record 25 million tons.
  • Chicago corn prices rallied only 8%, creating a decade-high spread between the MATIF (European) and CBOT (US) markets.
• Input Cost Risks
  • Nitrogen fertilizer prices have returned to pre-Iran conflict levels.
  • Upside risks persist due to elevated phosphate/potash prices and potential Hormuz strait disruptions.

US Treasury Market Dynamics

• The supply-demand backdrop for US Treasuries has become incrementally less supportive despite improved fixed-income flows.
• Japanese Holdings Trends
  • Japanese Treasury holdings rose only ~$25 billion year-to-date, remaining below 2024 levels.
  • This stagnation occurs despite a ~10% growth in the total Treasury market over the same period.
  • A potential shift in Japanese public pensions toward domestic assets could reduce future demand.
• Foreign Participation Metrics
  • Foreign participation in Treasury auctions has slipped from ~25% to below 20%.
  • Foreign official custodial holdings continue to decline.
  • Ongoing discussions focus on diversifying future sources of demand and reserve holdings.