Trillion-dollar defense budget in sight, Guggenheim strongly recommends defense stocks, L3Harris Technologies (LHX.US) is the top large-cap pick

According to Zhitong Finance APP, Guggenheim Securities recently initiated coverage on 22 aerospace and defense companies, with an overall tone that is bullish on defense contractors and aircraft manufacturers, but cautious towards suppliers in the commercial aviation aftermarket. The firm pointed out that, against a backdrop of weakening passenger demand and higher fuel costs facing airlines, outlook for the aftermarket sector is deteriorating.

Defense Stocks: Buy Window After More Than Half of Valuation Pullback

In the defense sector, Guggenheim believes a rare "oversold" buying opportunity is emerging. Analysts stated that since the highs of March 2026, defense stocks have cumulatively declined about 25%, with forward valuation multiples contracting by around 55%. Supported by geopolitical threats, weapons stockpiling, and military modernization, defense spending is poised to extend into the next decade. Therefore, this round of correction instead presents an opportunity to build positions.

Budget expectations further reinforce this judgment. Guggenheim expects the U.S. base national defense budget for fiscal year 2027 to reach approximately $1 trillion, with investment accounts (mainly including equipment procurement and technology R&D spending) expected to approach $600 billion, accounting for over 43% of total defense expenditures—this ratio was only 32% in fiscal 2013.

For investors, the core logic is that defense firms are presenting a rare combination of "low valuation + high revenue visibility". According to Guggenheim's statistics, listed defense contractors' backlog orders in Q2 increased 25% year-over-year, and rose 42% compared to Q2 2024. As contractors replenish missile inventories and deploy new generation technologies, capacity expansion is likely to further accelerate revenue growth.

Ten "Buy" Ratings: Average Upside Potential of About 38%

Specifically, Guggenheim issued "Buy" ratings to 10 companies: Applied Aerospace & Defense (AADX.US), BWX Technologies (BWXT.US), Curtiss-Wright (CW.US), Leonardo DRS (DRS.US), Kaman Holdings (KRMN.US), Kratos Defense (KTOS.US), L3Harris Technologies (LHX.US), Lyntris (LYNX.US), Mercury Systems (MRCY.US), and Northrop Grumman (NOC.US), with target prices implying an average upside of about 38%.

Among them, Applied Aerospace (AADX.US) is expected to offer the most substantial returns, as the target price of $30 implies 143% upside from the price quoted in the report; Kaman Holdings, Lyntris, and Kratos Defense (KTOS.US) imply potential gains of 79%, 60%, and 58% respectively. Moog (MOG.A/MOG.B), Redwire (RDW.US), and York Space Systems (YSS.US) were assigned "Neutral" ratings.

L3Harris Technologies: The Top Large Cap Pick with Restructuring Themes

Among large caps, L3Harris is Guggenheim's differentiated recommendation. The firm set a target price of $365 for the stock, implying a 49% upside from the report's reference price of $246. It believes that, aside from sector tailwinds driven by increased defense spending, value could be further unlocked by asset sales, business spin-offs, and industry consolidation initiatives.

However, analysts also concede that the bullish thesis faces multiple risks, including the November U.S. midterm elections, federal deficit pressures, rising interest rates, and uncertainty regarding supplemental appropriations. Currently, the government is operating on a continuing resolution only through December 11th, and major budget decisions will have to wait until after the elections.

Commercial Aviation: Divergent Outlook for New Aircraft Production and Aftermarket

In commercial aviation, Guggenheim offered diametrically opposed views on "new aircraft production" versus the "aftermarket". The firm is optimistic about suppliers tied to new aircraft manufacturing and expects Boeing's (BA.US) output to grow at a 11% annual compound rate through 2030, with wide-body jets at 15% and narrow-body jets at 10%. Howmet Aerospace (HWM.US), Hexcel (HXL.US), RBC Bearings (RBC.US), and Woodward (WWD.US) received "Buy" ratings, with an average upside potential of about 31%.

The aftermarket, however, faces headwinds. Guggenheim expects global passenger volume growth to slow to just 1.8% in 2026, well below last year's 5.4%; fare increases, slowing passenger flow, and more aircraft retirements could dampen component demand in the next six to twelve months. Therefore, AAR (AAR.US), HEICO (HEI.US), StandardAero (SARO.US), TransDigm (TDG.US), and VSE (VSEC.US) all received only "Neutral" ratings.