Aerospace & Defense: Fundamentals Stronger Than Sentiment Heading Into 3Q26 Earnings

Morgan Stanley remains bullish on Aerospace & Defense heading into 3Q26 earnings, with underlying fundamentals stronger than investor sentiment suggests. In Commercial Aerospace, we view the aftermarket selloff as overdone, with robust demand, constrained capacity, and pricing power supporting a multi-year upcycle, while OEM production continues to ramp despite persistent supply-chain challenges. In Defense, FY27 budget uncertainty and the November midterms remain overhangs, but accelerating missile demand and growing production commitments reinforce an exceptionally strong demand environment. Supply-chain execution, rather than demand, remains the primary constraint on growth. We see attractive opportunities ahead of earnings, particularly in GE, HWM, and NOC, and move Howmet to our Top Pick in Commercial Aerospace. We upgrade Moog to Overweight from Equal-weight with a price target of $448 (from $405).