J.P. Morgan expects aerospace and defense stocks to remain broadly supported into 2026, with commercial aerospace standing out as the clearest area of strength, while U.S. defense names face a more selective and politically complex environment, according to a Dec. 19 sector outlook from analysts led by Seth Seifman.
In aerospace, the firm said demand fundamentals remain strong, supported by multi-year production backlogs at Boeing (BA) and Airbus (EADSF) (EADSY), sustained growth in global air traffic and an aging commercial aircraft fleet. J.P. Morgan expects a gradual increase in aircraft production to underpin growth across both original equipment manufacturers and the aftermarket, particularly in engine maintenance, where capacity constraints remain significant.
Boeing still top pick
The bank named Boeing (BA), StandardAero (SARO) and ATI (ATI) as its preferred aerospace exposures, citing visible production growth, expanding margins and valuation support. Boeing (BA) remains a top pick, with analysts pointing to a path toward materially higher cash flow later in the decade as aircraft deliveries rise and defense execution stabilizes. ATI (ATI) was also highlighted for its increasing exposure to aerospace and defense demand as customers diversify away from Russian titanium.
J.P. Morgan said it remains constructive on high-valuation aerospace stocks such as GE Aerospace (GE) and Howmet Aerospace (HWM), even after sharp share-price gains in 2025, arguing that earnings momentum and sustained aftermarket demand could continue to drive upside despite elevated multiples.
Subtle differences in defense
In defense, the outlook is more nuanced. While global military spending is rising amid heightened geopolitical tensions and increased burden-sharing by U.S. allies, J.P. Morgan cautioned that the U.S. political backdrop introduces uncertainty. The firm said the current administration’s push to broaden the defense industrial base beyond traditional prime contractors has favored smaller and non-traditional players, complicating the investment case for larger incumbents.
Within defense products, the bank favors L3Harris Technologies (LHX), citing expectations for mid-single-digit revenue growth, margin expansion and recovery at its Aerojet Rocketdyne business. In services, Leidos (LDOS) was highlighted for its attractive valuation, margin potential and cash deployment flexibility.
Downgrading Lockheed Martin
J.P. Morgan downgraded Lockheed Martin (LMT) to Neutral from a previous investment rating of Overweight, citing concerns about longer-term free cash flow growth, including pension-related headwinds later in the decade and uneven execution across parts of its portfolio. While the company’s missile business is expected to grow, the bank said consensus expectations for cash flow expansion appear optimistic.
Overall, J.P. Morgan said the sector remains well positioned for 2026, but investors should be increasingly selective, particularly in defense, where program-level execution, budgeting risk and political dynamics are likely to drive dispersion in returns.
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