Aerospace & Defense Stocks Quietly Reach New Highs. Is It Still a Buy?

Notably, six of the top ten market cap stocks have significantly outperformed the S&P 500, each surging by 29% or more. Five of these six stocks hit record highs last month.

The aerospace sector, previously hit hard by the Boeing 737 Max crashes and COVID-19 travel restrictions, has seen those adverse factors subside.

Meanwhile, escalating global geopolitical tensions are driving unprecedented demand in the defense industry.

GE Aerospace designs and manufactures jet engines and aviation systems for Boeing and the military, and operates an aftermarket business for engine repairs and maintenance. The division is benefiting from a rebound in commercial air travel, increased defense orders, and its streamlined operations as an independent aerospace entity.

According to data shared by trading platform TrendSpider in late July, RTX stock has been one of the most favored by U.S. lawmakers since the beginning of 2023. Many of these lawmakers are members of the defense committees. The platform also noted that they "saw global tensions rising, and used it to their advantage."

The company manufactures aerospace parts specializing in aftermarket third-party components, which are typically 20-30% cheaper than original equipment from Boeing or Airbus. These parts, meeting Federal Aviation Administration standards, see increased demand during economic downturns as airlines seek cost reductions. HEICO also supplies various high-tech weapon components to the U.S. military.

As the world's largest defense contractor, LMT operates in defense, space, intelligence, homeland security, and information technology sectors. Since securing the F-35 Joint Strike Fighter project in 2001, it has dominated the Western high-end fighter jet market. Its aeronautics division is its largest segment, with over two-thirds of its revenue coming from the F-35 program.

On Tuesday, Wells Fargo downgraded the stock from "Equal Weight" to "Under Weight," slashing the price target from $185 to $119, causing the stock to plunge over 7% to its lowest level since November 2022. Analyst Matthew Akers noted, "we estimate paying this down would consume all of its cash through 2030." Akers also warned of several risks Boeing faces in the coming years, including upcoming union negotiations, integration plans with supplier Spirit AeroSystems Holdings, declining airline yields, and technical issues with its 777X and Starliner jets.

According to the International Civil Aviation Organization, current passenger air transport levels have surpassed pre-pandemic figures. Aviation transport demand in 2024 is expected to be 3% higher than in 2019.

Long-term, global defense spending continues to rise. The Stockholm International Peace Research Institute reports consistent growth in military expenditures over the past nine years. The U.S., China, Russia, India, and Saudi Arabia account for nearly two-thirds of this increase.

Republican presidential candidate and former President Donald Trump has proposed increasing the U.S. defense budget, a move supported by his Democratic counterpart, Vice President Kamala Harris, and President Joe Biden's administration.

"Both parties are pro-defense," said Matt Benkendorf, CIO for quality growth at Vontobel Asset Management. "Given the state of conflict in the world, geopolitical risks are getting hotter, not cooler."

Defense stocks generally see an initial boost during new conflicts but rarely maintain their gains due to the extended timelines of defense projects. Despite increased demand, revenue growth remains sluggish.

These stocks, however, often outperform during market volatility or economic uncertainty, given their critical role to governments and resilience to economic cycles.

Moreover, firms in the defense sector, benefiting from stable cash flows and government-backed R&D, are capable of delivering robust dividend payouts to investors.