A trillion-dollar defense budget is on the horizon, Guggenheim is pushing defense stocks, and L3Harris Technologies (LHX.US) has become the top large-cap pick.

Guggenheim Securities has initiated coverage on 22 aerospace and defense companies, with an overall tone of bullish on defense contractors and aircraft manufacturers, but cautious on commercial aviation aftermarket suppliers. The firm noted that against the backdrop of weakening passenger demand and airlines facing higher fuel costs, the outlook for the aftermarket sector is deteriorating. Defense Stocks: A Buying Window After Valuations Retreated by More Than Half In the defense sector, Guggenheim believes a rare "mispricing" buying opportunity is emerging. Analysts said defense stocks have fallen about 25% cumulatively since their March 2026 highs, with forward valuation multiples contracting by about 55%. Supported by GEO Group Inc political threats, weapons inventory replenishment, and military modernization, defense spending is expected to continue into the next decade, making this pullback a positioning opportunity instead. Budget-level expectations further reinforce this view. Guggenheim expects the U.S. base defense budget for fiscal 2027 to reach about $1 trillion; of that, investment accounts (mainly covering equipment procurement and technology R&D spending) are expected to approach $600 billion, accounting for more than 43% of total defense spending, compared with only 32% in fiscal 2013. For investors, the core logic is that defense companies are presenting a rare combination of "low valuations + high revenue visibility." According to Guggenheim, backlog for listed defense contractors rose 25% year over year in the second quarter and was up 42% from the second quarter of 2024. As contractors replenish missile stockpiles and deploy next-generation technologies, expansion of manufacturing capacity is also expected to further accelerate revenue growth. Ten "Buy" Ratings: Average Upside of About 38% On individual stocks, Guggenheim assigned "Buy" ratings to 10 companies: Applied Aerospace & Defense (AADX.US), BWX Technologies (BWXT.US), Curtiss-Wright (CW.US), Leonardo DRS (DRS.US), Kaman Corporation Class A Holding (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 average upside of about 38%. Among them, Applied Aerospace (AADX.US) has the most substantial expected return, with a $30 target price implying 143% upside from the price cited in the report; Kaman Corporation Class A Holding, 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 given "Neutral" ratings. L3Harris Technologies: Top Large-Cap Pick With Restructuring Optionality Among large-cap stocks, L3Harris is Guggenheim's differentiated recommendation. The firm gave it a $365 target price, implying 49% upside from the report's reference price of $246, and believes that in addition to the industry tailwind from rising defense spending, restructuring actions such as asset sales, business separations, and industry consolidation could further unlock company value. However, analysts also acknowledged that the bullish thesis faces multiple risks, including the November U.S. midterm elections, federal deficit pressure, rising interest rates, and uncertainty over supplemental appropriations. At present, government operations are being maintained only by a continuing resolution through December 11, and major budget decisions will have to wait until after the election. Commercial Aviation: Diverging Outlook for New Aircraft Manufacturing and the Aftermarket In commercial aviation, Guggenheim offered sharply contrasting views on "new aircraft production" and the "aftermarket." The firm is bullish on suppliers tied to new aircraft production and expects Boeing Company (BA.US) output to grow at an 11% compound annual growth rate through 2030, with widebody growth at 15% and narrowbody at 10%. Howmet Aerospace (HWM.US), Hexcel Corporation (HXL.US), RBC Bearings (RBC.US), and Woodward, Inc. (WWD.US) received "Buy" ratings, with average upside of about 31%. The aftermarket, by contrast, faces headwinds. Guggenheim expects global passenger traffic growth of only 1.8% in 2026, far below last year's 5.4%; higher fares, slower passenger flows, and more aircraft retirements could weaken parts demand over the next 6 to 12 months. As a result, AAR (AAR.US), HEICO (HEI.US), StandardAero (SARO.US), TransDigm (TDG.US), and VSE (VSEC.US) all received only "Neutral" ratings.