Guggenheim Securities has kicked off coverage on 22 aerospace and defense companies with a clear stance: bullish on defense contractors and aircraft manufacturers, but cautious on commercial aviation aftermarket suppliers. The firm points to weakening passenger demand and rising fuel costs for airlines as key reasons the aftermarket segment's outlook is deteriorating.

Defense stocks: a buying window after valuation pullback

In the defense arena, Guggenheim believes a rare "misguided sell-off" has created a compelling entry point. Analysts note defense shares have fallen roughly 25% from their March 2026 peak, while forward valuation multiples have contracted by approximately 55%. With geopolitical threats, weapons inventory replenishment, and military modernization programs expected to sustain defense spending well into the next decade, this correction offers a strategic opportunity rather than a warning sign.

Budget projections further bolster this thesis. Guggenheim forecasts the fiscal 2027 U.S. base defense budget will reach roughly $1 trillion, with investment accounts—primarily covering equipment procurement and technology R&D—approaching $600 billion, or more than 43% of total defense spending. That compares with just 32% in fiscal 2013.

For investors, the core rationale lies in defense companies displaying a rare combination of "low valuations plus high revenue visibility." According to Guggenheim, listed defense contractors saw backlog grow 25% year-over-year in the second quarter, and up 42% compared to the second quarter of 2024. As contractors replenish missile inventories and deploy next-generation technologies, expansion of manufacturing capacity is expected to further accelerate revenue growth.

Ten "Buy" ratings: average upside of roughly 38%

Turning to 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), Karman Holdings (KRMN.US), Kratos Defense (KTOS.US), L3Harris Technologies (LHX.US), Lyntris (LYNX.US), Mercury Systems (MRCY.US), and Northrop Grumman (NOC.US). The average implied upside from target prices is approximately 38%.

Among them, Applied Aerospace (AADX.US) offers the most substantial expected return, with a $30 price target implying 143% upside from the report's reference price. Karman 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 appeal

Among large caps, L3Harris is Guggenheim's differentiated recommendation. The firm set a $365 price target, implying 49% upside from the report's reference price of $246. Beyond the industry tailwind from rising defense spending, analysts see asset sales, divestitures, and industry consolidation as catalysts that could further unlock shareholder value.

However, analysts acknowledge multiple risks to the bullish thesis, including the November U.S. midterm elections, federal deficit pressures, higher interest rates, and uncertainty surrounding supplemental appropriations. The government currently operates under a continuing resolution extending only to December 11, meaning major budget decisions won't be finalized until after the elections.

Commercial aviation: divergent outlook for new aircraft and aftermarket

In the commercial aviation space, Guggenheim draws a sharp contrast between "new aircraft production" and "aftermarket services." The firm is bullish on suppliers tied to new aircraft output, forecasting Boeing (BA.US) production will grow at an 11% compound annual growth rate through 2030, with widebodies expanding at 15% and narrowbodies at 10%. Howmet Aerospace (HWM.US), Hexcel (HXL.US), RBC Bearings (RBC.US), and Woodward (WWD.US) received "Buy" ratings, with average upside of about 31%.

The aftermarket segment, by contrast, faces headwinds. Guggenheim projects global passenger traffic growth of just 1.8% in 2026, well below last year's 5.4%. Rising ticket prices, slowing passenger volumes, 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.