A&D 3Q26 Preview: A Tricky Setup; Downgrade LDOS to Neutral

The market is near an all-time high but A&D stocks were weak in Q3 and sentiment is sour. Fundamentally, lack of traffic growth is weighing on Aero, while the budget implications of the midterms are an overhang for Defense. Nevertheless, we see potential for most results to be solid and expect most mgmt teams to be upbeat regarding the demand environment (except Services), with most challenges remaining on the supply side. It's not clear whether this commentary will improve sentiment, which makes for a difficult environment to navigate. On the long side, we look to HWM in Aero, where positive revisions should continue, alongside HONA, where low expectations could bring a squeeze. In Defense, we think HII and LMT can outperform. We're also downgrading LDOS to Neutral while lowering estimates. Further thoughts are below and the note includes a few model changes, but our full preview is in this deck.