The Zhitong Finance App learned that J.P. Morgan believes that aerospace and defense companies are about to enter a challenging third quarter earnings season — the slowdown in air passenger traffic growth, uncertainty about the prospects for US military spending, and continued supply chain restrictions are all putting pressure on investor sentiment.
In a research report released on October 8, Seth M. Seifman, chief aerospace and defense industry analyst at J.P. Morgan Chase, said that most companies should be able to hand over solid quarterly results and express confidence in underlying demand. However, even if the earnings performance is encouraging, it may not be enough to reverse the sector's recent weak stock price trend. Seth M. Seifman wrote, “The market is close to historic highs, but aerospace and defense stocks performed weakly in the third quarter, and market sentiment has deteriorated.”
The analyst listed Howmet Aerospace (HWM.US), Honeywell Aerospace (HONA.US), Huntington Ingalls Industries (HII.US), and Lockheed Martin (LMT.US) as stocks likely to outperform the market during the earnings season. J.P. Morgan also downgraded the rating of Leidos Holdings (LDOS.US) from “surplus” to “neutral,” citing that the company's profit expectations are deteriorating.
For investors, the report highlights growing divisions within the industry — aerospace manufacturers benefit from increased production, defense contractors are supported by long-term demand for weapons, and government services firms face pressure on revenue and profitability.
Even if the financial report performs well, it may not be enough to boost sector sentiment
The broader message conveyed by Komo is that although the basic needs of aerospace and defense companies are generally improving, they are still facing an extremely difficult financial reporting environment.
Commercial aerospace suppliers continue to benefit from aircraft production demands and backlogs of maintenance orders; at the same time, defense manufacturers also have business opportunities related to missile, shipbuilding, and military modernization. However, market expectations for some companies are already high, and there is uncertainty about future government spending. Coupled with the slowdown in the growth rate of air passenger traffic, it may limit investors' willingness to further increase the valuation multiples of related stocks.
Analysts tend to focus on two types of companies: those that have opportunities to raise profit expectations, and those that have sufficient market expectations to rebound. This strategy means that in the field of commercial aerospace, J.P. Morgan is more optimistic about Howmet Aerospace and Honeywell Aerospace; in the field of defense, it favors Lockheed Martin and Huntington Ingalls Industries. In contrast, government service providers such as Leidos are still facing a more difficult path to recovery.
Howmet Aerospace, Honeywell Aerospace provide investment opportunities in the aerospace sector
Despite market concerns about changes in the aircraft engine supply chain, J.P. Morgan is still optimistic about Howmet Aerospace. Howmet Aerospace's stock price is under pressure, in part because GE Aerospace (GE.US) plans to acquire Consolidated Precision Products, while another supplier is also developing blade casting capabilities. These developments have raised questions in the market about Howmet Aerospace's long-standing competitive position in aerospace castings. Analysts expect Howmet Aerospace's 2026 profit forecast to be raised, and management is expected to remain confident about the growth prospects of the aerospace and industrial gas turbine business.
Analysts also believe Honeywell Aerospace's stock price may rebound. Since the company announced its second-quarter results, its stock price has fallen by more than 25%, while the Industrial Select Industry SPDR Fund (XLI) fell by only about 10% during the same period. Despite Honeywell Aerospace's long-term challenges, J.P. Morgan believes that market expectations have been lowered sufficiently, so as long as the company's performance falls short of expectations, there may be limited room for further stock price decline.
Meanwhile, TransDigm Group (TDG.US) may benefit from better-than-expected preliminary results guidance for FY2027. J.P. Morgan predicts that demand in the aviation aftermarket will remain healthy despite market concerns about a slowdown in the growth rate of air passenger traffic and possible changes in aircraft maintenance regulations. The bank warned that if global air passenger traffic stagnates for a long time, it may eventually weaken maintenance requirements. However, the current backlog of engine maintenance work should continue to support aerospace aftermarket suppliers in the coming quarters.
US midterm elections cast a shadow over defense spending prospects
The November National Assembly election is another potential source of volatility faced by defense contractors. Since March, US defense stocks have been under pressure. Investors are evaluating whether congressional control may change and whether such changes will limit the growth of military spending.
Analysts said that some election-related uncertainties may gradually dissipate after voting ends on November 3, but negotiations over the 2027 federal budget may continue long after Election Day. The analyst also pointed out that rising government borrowing costs are also a factor requiring long-term attention, as there may be financial competition between interest expenses and discretionary defense spending. For investors, the timing of funding arrangements and contract awards may be as important as the final size of the defense budget.
The defense sector is optimistic about Lockheed Martin and Huntington Ingalls Industries
J.P. Morgan listed Lockheed Martin and Huntington Ingalls Industries as the defense stocks of choice before the third-quarter earnings report was announced, although both stocks are currently rated “neutral.”
For Lockheed Martin, Damo expects the company to continue to improve execution performance and benefit from a significant increase in the backlog of orders driven by missile contracts. Analysts said the company's missile and fire control business is still an important factor in attracting investors.
Huntington Ingalls Industries is likely to benefit from progress in major shipbuilding projects, including milestones relating to the aircraft carrier “John F. Kennedy” (CVN-79) and a submarine contract awarded in July. Analysts believe these developments support the market's profitability and cash flow expectations for the rest of 2026.
Since the most recent earnings report, Huntington Ingalls Industrial's stock price has fallen by about 20%; in comparison, Lockheed Martin is down 13% and Northrop Grumman (NOC.US) is down 12%. This may create room for stock prices to respond positively to positive news.
Furthermore, J.P. Morgan is more cautious about Northrop Grumman because the company benefited from relatively limited demand for missiles and lost in the US Navy's F/A-XX next-generation carrier-based fighter project.
Profit prospects weaken, Leidos rating downgraded
J.P. Morgan cut the target price for Leidos from $160 to $142, reflecting the bank's concerns about the company's healthcare business and the risk that the company's performance may be further disappointed.
The new target price is still about 25% higher than Leidos' closing price of $113.55 on October 7. However, analysts believe that although the company's valuation is relatively low, this is not enough to support the “gain” rating, especially when other aerospace and defense stocks also have significant potential returns.
J.P. Morgan expects Leidos' revenue in 2027 to be around US$18.1 billion, lower than the 2026 forecast of US$18.35 billion; adjusted profit before interest, tax, depreciation and amortization (EBITDA) is expected to fall from US$2.45 billion to US$2.14 billion. Analysts pointed out that the market's unanimous expectation is that the adjusted EBITDA for Leidos in 2027 is still estimated to be around US$2.45 billion, which indicates that the published profit expectations of the market may be too optimistic. The bank also expects Leidos' adjusted EBITDA margin to fall from 13.3% to 11.8%, mainly due to weak performance in its healthcare business — the business segment's profit margin is expected to fall from 22% to 16%.
Despite this, there are potential growth opportunities for Leidos in defense products, energy infrastructure, and Federal Aviation Administration (FAA) modernization projects. If the company achieves favorable results in the US Department of Veterans Affairs contract re-bid, its business prospects may also improve.
There are hidden concerns about cash flow, and Boeing is still rated as “overweight”
Komo maintains an “plus” rating for Boeing (BA.US) and a target price of $290. The target price is about 54% higher than Boeing's closing price of $188.32 on October 7. The bank continues to believe that Boeing is expected to increase the production of 737 and 787 aircraft, push forward progress on the under-progressing 777X project, and stabilize the performance of its defense business.
However, analysts also acknowledged that market expectations for Boeing's 2027 cash flow have weakened, and uncertainty about aircraft production prospects has also heightened investors' cautious sentiment. Komo expects Boeing's 2027 revenue to rise from US$96.31 billion in 2026 to US$108.46 billion; adjusted free cash flow is expected to increase from US$1.84 billion to approximately US$5.55 billion. The bank's long-term investment logic depends on Boeing's ability to turn an order backlog of about 500 billion US dollars into actual aircraft delivery, thereby increasing cash generation capacity and reducing debt levels.
Komo also maintains an “plus” rating for StandardAero (SARO.US) and a target price of $40, citing growth opportunities for commercial aircraft engine maintenance and parts maintenance services with higher margins.