Morgan Stanley Backs Aerospace & Defense Ahead of Q2 Earnings, Urges Selectivity

Morgan Stanley reiterated its bullish stance on the aerospace and defense sector heading into the second-quarter earnings season, citing resilient fundamentals in commercial aerospace and favorable long-term defense spending trends. However, the investment bank noted it has become more selective in its stock recommendations following recent market volatility and shifts in valuation.

Sector Strengths Remain Intact

Analysts at the firm pointed to several key drivers supporting their positive view. In commercial aerospace, they highlighted durable aftermarket demand fueled by high fleet utilization, low aircraft retirement rates, and persistent engine maintenance needs. Morgan Stanley also noted that Boeing's production recovery is gaining momentum, with the 737 MAX program reportedly running at a rate of 47 aircraft per month.

For the defense segment, the bank believes investors are underestimating the potential for the U.S. base defense budget to reach approximately $1.1 trillion by fiscal year 2027. This, combined with supply-chain improvements and expanding missile production capacity, is expected to provide further upside for defense contractors. The space industry is also poised to benefit from upcoming launch milestones and NASA's procurement for a commercial International Space Station.

Ratings Reshuffled on Valuation Concerns

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Reflecting a more selective approach, Morgan Stanley adjusted its ratings on several companies, emphasizing that the changes were driven by valuation rather than a weakening of underlying business fundamentals.

Key rating changes include:

• Loar Holdings (LOAR) and TransDigm (TDG) were downgraded to Equal-weight.
• CAE and Voyager Technologies (VOYG) were cut to Underweight.

At the same time, the firm named its new top picks across the sector. FTAI Aviation was highlighted as its preferred commercial aerospace stock, Northrop Grumman as its top defense pick, and HawkEye 360 as its leading space investment. The brokerage also issued a mix of price target revisions, lowering them for companies like Honeywell and Textron while raising them for Heico and Curtiss-Wright.