These 10 stocks are poised for earnings surprises in April: Morgan Stanley

Morgan Stanley's Earnings Surprise Composite has delivered pre-cost Sharpe ratios of 1.06 (U.S.) and 0.92 (Europe) since 2024, and 0.69/0.71 respectively on a longer five-year lookback. The bank highlights U.S. overweight names including Western Digital, Citigroup, RTX, Apple, eBay, ConocoPhillips and Roblox, and European overweight picks led by ArcelorMittal, Barclays, ASML, Nokia, Santander, ASM International and UPM-Kymmene. Morgan Stanley argues blending quantitative signals with analyst views can help position for elevated earnings dispersion and earnings-driven volatility into the reporting season.

Analysis

A quant-driven earnings-surprise signal set will compress common factors and amplify idiosyncratic sources of return over earnings windows. That creates transient dislocations: names with high surprise odds will see options vols bid pre-event while equity positions gap on beats/misses, producing asymmetric payoffs for owners of directional vs volatility exposure within a 3–14 day window.

Second-order supply-chain effects matter: a positive surprise in storage (WDC) is not just a revenue beat — it implies tighter component demand (controller ICs, NAND wafers) that should lift upstream equipment and specialty materials for 1–3 quarters, while an upside at steel/cyclical makers (MT) feeds immediate working-capital improvement and could push raw-material suppliers into a tighter pricing band. Conversely, bank upside (C) that leans on buybacks or lower provisioning compresses float available to deleveraging hedges, pressuring short-dated funding spreads.

The options market is the quickest arb: implied vol often overshoots realized after big consensus upgrades, creating an opportunity to sell premium into crowded event-driven positioning or buy convexity where flows are one-sided. Macro and geopolitical shocks remain the top reversal risk; a sudden risk-off spike will widen bid-ask for event trades and favor delta-hedged volatility sellers who can withstand short-lived jumps rather than directional equity holders.

Key Decisions for Investors

• WDC — Buy a 2–3 week at-the-money straddle sized 1–2% NAV into earnings window. Rationale: capture >8% move potential from an idiosyncratic surprise; close at +50% premium gain or cut at 100% premium loss. Timeframe: days-to-weeks.
• MT — Buy a 3-month 15–25% OTM call spread (financed by selling nearer-term calls) size 1% NAV. Rationale: asymmetric upside from stronger pricing/working-capital recovery with limited premium paid; target 2:1 upside vs max loss. Hedge by selling a small iron-ore proxy position if available.
• C vs BCS pair — Long C equity (1–3% NAV) and short BCS (matched notional) for 1–3 months to play US NII resilience vs European banking pressure. Rationale: capture 200–500 bps relative rerating on US bank fundamentals while hedging systemic macro moves; stop if spread moves >20% against position.
• RTX — Buy 2–4 month calls (OTM) size 0.5–1% NAV to express convexity to geopolitical escalation. Rationale: limited premium to capture rapid re-rate if defense spending narrative accelerates; take profits on +100% option premium or if implied vol compresses >30% post-news.