JPMorgan believes aerospace and defense companies are heading into a challenging third-quarter earnings season, as slowing air passenger traffic growth, uncertainty over the outlook for U.S. military spending, and persistent supply chain constraints all weigh on investor sentiment.

In a research note published on October 8, Seth M. Seifman, JPMorgan's chief aerospace and defense analyst, said most companies should be able to deliver solid quarterly results and express confidence in underlying demand. However, even encouraging earnings may not be enough to reverse the sector's recent share price weakness. Seifman wrote: "The market is near record highs, but aerospace and defense stocks performed poorly in the third quarter, and sentiment has deteriorated." The analyst named Howmet Aerospace (HWM.US), Honeywell Aerospace (HONA.US), Huntington Ingalls Industries (HII.US), and Lockheed Martin (LMT.US) as stocks that could outperform during the earnings season. JPMorgan also downgraded Leidos Holdings (LDOS.US) from "Overweight" to "Neutral," citing deteriorating earnings expectations for the company.

For investors, the report highlights growing divergence within the sector — aerospace manufacturers benefit from production growth, defense contractors are supported by long-term weapons demand, while government services companies face pressure on revenue and profitability.

Even Good Earnings May Not Be Enough to Lift Sector Sentiment

The broader message from JPMorgan is that while underlying demand for aerospace and defense companies is generally positive, they still face an unusually difficult earnings environment. Commercial aerospace suppliers continue to benefit from aircraft production demand and a backlog of maintenance orders; meanwhile, defense manufacturers also have business opportunities related to missiles, shipbuilding, and military modernization. However, market expectations for some companies are already elevated, uncertainty over future government spending exists, and slowing air passenger traffic growth could all limit investors' willingness to further raise valuation multiples for related stocks.

The analyst prefers to focus on two types of companies: those with opportunities for upward earnings revisions, and those whose market expectations are already low enough to have room for a rebound. This strategy means that in commercial aerospace, JPMorgan favors Howmet Aerospace and Honeywell Aerospace; in defense, it prefers Lockheed Martin and Huntington Ingalls Industries. By contrast, government services providers like Leidos still face a more difficult recovery path.

Howmet Aerospace and Honeywell Aerospace Offer Aerospace Investment Opportunities

Despite market concerns about changes in the aircraft engine supply chain, JPMorgan remains bullish on Howmet Aerospace. Howmet Aerospace's stock has come under pressure, partly due to GE Aerospace's (GE.US) plan to acquire Consolidated Precision Products, while another supplier is also developing blade casting capabilities. These developments have raised questions about Howmet Aerospace's long-term competitive position in aerospace castings. The analyst expects Howmet Aerospace's 2026 earnings forecasts to be revised upward and anticipates that management will remain confident in the growth outlook for aerospace and industrial gas turbine businesses.

The analyst also believes Honeywell Aerospace's stock could rebound. Since the company reported second-quarter results, its shares have fallen more than 25%, while the Industrial Select Sector SPDR Fund (XLI) declined only about 10% over the same period. Despite Honeywell Aerospace's long-term challenges, JPMorgan believes market expectations have been sufficiently lowered, so as long as the company does not miss expectations, further downside for the stock may be limited.

Meanwhile, TransDigm Group (TDG.US) could benefit from stronger-than-expected preliminary fiscal 2027 guidance. JPMorgan expects aftermarket demand to remain healthy despite concerns about slowing air passenger traffic growth and potential changes to aircraft maintenance regulations. The bank warned that if global air passenger traffic stagnates for a prolonged period, it could eventually weaken maintenance demand. However, the current backlog of engine repair work should continue to support aerospace aftermarket suppliers in the coming quarters.

U.S. Midterm Elections Cast a Shadow Over Defense Spending Outlook

The congressional elections in November are another potential source of volatility for defense contractors. Since March, U.S. defense stocks have been under pressure as investors assess whether control of Congress could change and whether such a change would limit growth in military spending. The analyst said some election-related uncertainty may gradually dissipate after voting ends on November 3, but negotiations over the fiscal 2027 federal budget could continue well beyond Election Day. The analyst also noted that rising government borrowing costs are a factor to watch over the long term, as competition for funds could emerge between interest expenses and discretionary defense spending. For investors, the timing of appropriations and contract awards may be just as important as the final size of the defense budget.

Lockheed Martin and Huntington Ingalls Industries Favored in Defense

JPMorgan named Lockheed Martin and Huntington Ingalls Industries as its preferred defense stocks ahead of third-quarter earnings, even though both currently carry a "Neutral" rating. For Lockheed Martin, the bank expects the company to continue improving execution and benefit from a significant increase in order backlog driven by missile contracts. The analyst said the company's missiles and fire control business remains an important factor attracting investors. Huntington Ingalls Industries could benefit from progress on major shipbuilding programs, including milestones related to the aircraft carrier John F. Kennedy (CVN-79) and a submarine contract awarded in July. The analyst believes these developments support market expectations for the company's profitability and cash flow for the remainder of 2026. Since its most recent earnings report, Huntington Ingalls Industries shares have fallen about 20%; by comparison, Lockheed Martin is down 13% and Northrop Grumman (NOC.US) is down 12%. This could create room for positive stock reactions to good news.

Additionally, JPMorgan is more cautious on Northrop Grumman, due to the company's relatively limited exposure to missile demand and its loss in the competition for the U.S. Navy's F/A-XX next-generation carrier-based fighter program.

Weakening Earnings Outlook Leads to Leidos Downgrade

JPMorgan cut its price target on Leidos from $160 to $142, reflecting concerns about the company's healthcare business and the risk of further disappointing results. The new target still implies about 25% upside from Leidos' October 7 closing price of $113.55. However, the analyst believes that despite the company's relatively low valuation, this is not enough to support an "Overweight" rating, especially when other aerospace and defense stocks also offer considerable potential returns. JPMorgan expects Leidos revenue of about $18.1 billion in 2027, down from an estimated $18.35 billion in 2026; adjusted EBITDA is projected to decline from $2.45 billion to $2.14 billion. The analyst noted that consensus estimates still expect Leidos adjusted EBITDA of about $2.45 billion in 2027, suggesting that published earnings expectations may be too optimistic. The bank also expects Leidos' adjusted EBITDA margin to fall from 13.3% to 11.8%, mainly due to weakness in its healthcare business — margins in that segment are expected to drop from 22% to 16%. Nevertheless, Leidos still has potential growth opportunities in defense products, energy infrastructure, and Federal Aviation Administration (FAA) modernization projects. Its business outlook could also improve if the company achieves a favorable outcome in the recompete for a U.S. Department of Veterans Affairs contract.

Cash Flow Concerns Persist, but Boeing Retains "Overweight" Rating

JPMorgan maintained its "Overweight" rating and $290 price target on Boeing (BA.US). The target implies about 54% upside from Boeing's October 7 closing price of $188.32. The bank continues to believe Boeing can increase production of the 737 and 787, advance the delayed 777X program, and stabilize performance in its defense business. However, the analyst also acknowledged that market expectations for Boeing's 2027 cash flow have weakened, and uncertainty over aircraft production prospects has added to investor caution. JPMorgan expects Boeing revenue to rise from an estimated $96.31 billion in 2026 to $108.46 billion in 2027; adjusted free cash flow is projected to increase from $1.84 billion to about $5.55 billion. The bank's long-term investment thesis depends on whether Boeing can convert its approximately $500 billion order backlog into actual aircraft deliveries, thereby improving cash generation and reducing debt levels.

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