The chill persists in US aerospace and defense stocks! JPMorgan warns: Defense budget outlook dims, aviation demand cools, strong Q3 results may not reverse the downward trend.

According to Zhitong Finance APP, JPMorgan believes that aerospace and defense companies are about to face a challenging third-quarter earnings season—slowing air passenger growth, uncertainties around U.S. defense spending, and ongoing supply chain constraints are weighing on investor sentiment.

In a research report released on October 8, JPMorgan’s Head Aerospace & Defense Analyst Seth M. Seifman stated that most companies should be able to deliver solid quarterly results and express confidence in underlying demand. However, even if earnings are encouraging, it may not be enough to reverse the sector's recent stock price weakness. Seth M. Seifman wrote: “The broader markets are near historical highs, but aerospace and defense stocks were weak in Q3, and market sentiment has turned.”

The analyst listed Howmet Aerospace (HWM.US), Honeywell Aerospace (HONA.US), Huntington Ingalls Industries (HII.US), and Lockheed Martin (LMT.US) as stocks that may outperform during earnings season. JPMorgan also downgraded Leidos Holdings (LDOS.US) from “Overweight” to “Neutral” due to deteriorating profit expectations.

For investors, this report highlights the growing internal divergence within the industry—commercial aerospace manufacturers are benefiting from production growth, defense contractors are supported by long-term weapons demand, while government services firms face pressure on revenues and profitability.

Even Strong Earnings May Not Be Enough to Lift Sector Sentiment

JPMorgan's broader message is that while underlying demand for aerospace and defense companies remains robust overall, they still face an exceptionally tough earnings environment.

Commercial aerospace suppliers continue to benefit from demand for aircraft production and backlogged maintenance orders; at the same time, defense manufacturers have business opportunities related to missiles, shipbuilding, and military modernization. However, some companies’ market expectations are already high, future government spending is uncertain, and slowing air passenger growth may all limit investors’ willingness to further raise valuation multiples for these stocks.

Analysts tend to focus on two types of companies: those with the potential for upward earnings revisions, and those where expectations are already sufficiently low, providing room for a rebound. This strategy leads JPMorgan to prefer Howmet Aerospace and Honeywell Aerospace in commercial aerospace; in defense, Lockheed Martin and Huntington Ingalls Industries are favored. In contrast, government service providers like Leidos still face a more difficult path to recovery.

Howmet Aerospace, Honeywell Aerospace Provide Investment Opportunities in Aerospace

Despite market concerns over changes in the aircraft engine supply chain, JPMorgan remains positive on Howmet Aerospace. The company's stock has been under pressure partly due to GE Aerospace (GE.US) planning to acquire Consolidated Precision Products, while another supplier is developing blade casting capabilities. These developments have raised doubts in the market over Howmet Aerospace’s long-term competitive position in aerospace castings. Analysts anticipate that earnings forecasts for Howmet Aerospace for 2026 will be revised upward and expect management to remain confident about the growth prospects for its aerospace and industrial gas turbine businesses.

Analysts also believe that Honeywell Aerospace's share price may rebound. Since the company released second-quarter results, its stock has fallen more than 25%, compared to roughly a 10% drop in the Industrial Select Sector SPDR Fund (XLI) over the same period. Although Honeywell Aerospace faces long-term challenges, JPMorgan believes expectations have been sufficiently lowered, so unless the company misses expectations, further downside may be limited.

Meanwhile, TransDigm Group (TDG.US) may benefit from stronger-than-expected preliminary guidance for fiscal 2027. JPMorgan expects that despite concerns about slowing air passenger growth and possible changes to aircraft maintenance regulations, demand in the aerospace aftermarket will remain healthy. The firm warns, however, that if global air passenger numbers stagnate long-term, maintenance demand could eventually weaken. For now, the current backlog of engine maintenance work should support aerospace aftermarket suppliers in the coming quarters.

U.S. Midterm Elections Cast Uncertainty Over Defense Spending Outlook

The congressional elections in November represent another potential source of volatility for defense contractors. Since March, U.S. defense stocks have been under pressure, with investors assessing whether there could be a shift in congressional control and whether this could limit growth in defense spending.

Analysts note that some election-related uncertainty may gradually dissipate after the November 3 vote, but negotiations over the federal budget for fiscal 2027 may continue long after election day. The analyst also points out that rising government borrowing costs are a long-term concern, as there may be competition for funds between interest expenses and discretionary defense spending. For investors, the timing of appropriations and contract awards may be as important as the final size of the defense budget.

Defense Sector Favors Lockheed Martin and Huntington Ingalls Industries

JPMorgan listed Lockheed Martin and Huntington Ingalls Industries as its top defense picks ahead of Q3 earnings, though both are rated “Neutral.”

For Lockheed Martin, JPMorgan expects the company to continue improving its execution and benefit from a large order backlog driven by missile contracts. Analysts say its Missiles and Fire Control business remains a key attraction for investors.

Huntington Ingalls Industries may benefit from progress on major shipbuilding projects, including key milestones for the “John F. Kennedy” aircraft carrier (CVN-79) and a submarine contract awarded in July. Analysts believe these developments support market expectations around the company's profitability and cash flow for the remainder of 2026.

Since its last earnings release, Huntington Ingalls Industries shares have fallen about 20%; in comparison, Lockheed Martin is down 13% and Northrop Grumman (NOC.US) is down 12%. This may provide room for positive share price reactions to good news.

Moreover, JPMorgan is more cautious on Northrop Grumman due to its relatively limited benefit from missile demand and its failure to win the U.S. Navy F/A-XX next-generation carrier-based fighter competition.

Weaker Earnings Outlook Leads to Downgrade for Leidos

JPMorgan lowered its target price for Leidos from USD 160 to USD 142, reflecting concerns over the company's health business and the risk of further disappointing results.

The new target price is still about 25% above Leidos’s closing price of USD 113.55 on October 7. However, analysts believe that while the company’s valuation is relatively low, this is not enough to support an “Overweight” rating—especially when other aerospace and defense stocks also offer attractive potential returns.

JPMorgan expects Leidos to generate revenue of about USD 18.1 billion in 2027, down from an estimated USD 18.35 billion in 2026; adjusted EBITDA is expected to fall from USD 2.45 billion to USD 2.14 billion. Analysts note that consensus still calls for adjusted EBITDA of about USD 2.45 billion in 2027, signaling that market profit expectations may be too optimistic. The firm also expects Leidos’s adjusted EBITDA margin to fall from 13.3% to 11.8%, mainly due to the weakness in its health segment—where margins are forecast to drop from 22% to 16%.

Nevertheless, Leidos still has potential growth opportunities in defense products, energy infrastructure, and U.S. Federal Aviation Administration (FAA) modernization projects. If the company achieves favorable results in the rebidding of the U.S. Department of Veterans Affairs contract, its business outlook may improve as well.

Cash Flow Concerns Remain, but Boeing Still Rated “Overweight”

JPMorgan maintains its “Overweight” rating and USD 290 target price on Boeing (BA.US). This target is about 54% higher than Boeing’s October 7 closing price of USD 188.32. The firm continues to believe that Boeing can ramp up 737 and 787 production, make progress on the delayed 777X program, and stabilize its defense business.

However, analysts also acknowledge that market expectations for Boeing’s 2027 cash flow have weakened, and uncertainty around aircraft production adds to investor caution. JPMorgan expects 2027 revenue for Boeing to increase from USD 96.31 billion in 2026 to USD 108.46 billion; adjusted free cash flow is projected to rise from USD 1.84 billion to about USD 5.55 billion. The long-term investment logic rests on Boeing’s ability to convert its nearly USD 500 billion order backlog into actual aircraft deliveries, thus increasing cash generation and reducing debt.

JPMorgan also maintains its “Overweight” rating and USD 40 target price on StandardAero (SARO.US), citing growth opportunities in commercial aircraft engine maintenance and higher-margin component repair services.