Morgan Stanley has reaffirmed a broadly favorable outlook for the aerospace and defense sector ahead of second-quarter earnings, highlighting persistent commercial aftermarket demand, a pick-up in aircraft production and encouraging trends in defense spending. At the same time, the firm said recent price moves and valuation dispersion have prompted a more selective stance on individual stocks.
Commercial aerospace
The brokerage pointed to durable aftermarket demand as a key underpinning for commercial aerospace. That demand, it said, is being supported by steady fleet utilization, low rates of aircraft retirements, constrained maintenance capacity and ongoing engine maintenance needs. Morgan Stanley also singled out Boeing's production recovery as gaining traction, noting the 737 MAX is operating at a 47-aircraft-per-month cadence and that additional certification steps are expected to bolster the commercial aerospace outlook.
Defense outlook
On defense, Morgan Stanley argued investors may be underestimating the probability of a roughly $1.1 trillion U.S. fiscal 2027 base defense budget. The firm cited supply-chain improvements and the expansion of missile production capacity as potential sources of upside for defense-related companies.
Space sector
The report expects space companies to benefit from upcoming launch milestones, improving order trends and NASA's commercial International Space Station procurement activity. Those factors, Morgan Stanley said, should support the space subsector's revenue and order momentum.
Ratings and preferences
Reflecting valuation movements rather than deteriorating fundamentals, Morgan Stanley adjusted ratings on several names. It downgraded Loar Holdings and TransDigm to Equal-weight and cut CAE and Voyager Technologies to Underweight. Concurrently, the firm identified FTAI Aviation as its top commercial aerospace pick, chose Northrop Grumman as its preferred defense stock and named HawkEye 360 as its leading space investment.
Price target revisions and market breadth
The brokerage also updated multiple price targets. It lowered targets for Honeywell Aerospace, VSE, Textron, StandardAero, Loar and TransDigm while raising targets for Heico, Curtiss-Wright and Moog. Morgan Stanley noted that the expanding universe of publicly traded aerospace and defense companies increases opportunities for investors but also requires more selective stock selection.
Implications
- Commercial aerospace is supported by aftermarket dynamics and improving production rates.
- Defense could see upside if a larger fiscal 2027 base budget materializes and production capacity expands.
- Space-related firms may benefit from launch activity and procurement trends.
Overall, the firm retained a constructive sector view while narrowing its conviction on certain names as valuations shifted.