Key Moments
- Morgan Stanley sees U.S. defense stocks as undervalued relative to projected growth in the defense budget.
- The bank upgraded L3Harris Technologies and General Dynamics to Overweight, while lowering Lockheed Martin to Equal-weight.
- Northrop Grumman remains the firm’s top defense pick, supported by its portfolio outlook and trading history.
Valuation Case for U.S. Defense Sector
Investing.com — Morgan Stanley considers U.S. defense equities attractively priced heading into 2026. Analysts argue current market valuations do not fully reflect the expected expansion in the U.S. defense budget amid political uncertainty.
In an outlook report, analyst Kristine Liwag stated that the group offers solid value because “stocks are not reflecting the growth in the U.S. Defense budget.”
The firm expects demand to continue exceeding supply growth. This dynamic helped defense stocks perform strongly across the aerospace and defense sector in 2025.
Rating Changes Across Major Defense Primes
Morgan Stanley updated ratings after reassessing sector valuations. The bank upgraded L3Harris Technologies and General Dynamics to Overweight, signaling a more positive outlook. Meanwhile, Lockheed Martin was downgraded to Equal-weight.
| Company | New Morgan Stanley Rating | Valuation Comment |
|---|---|---|
| L3Harris Technologies | Overweight | Assigned baseline discount on 2027 P/FCF |
| General Dynamics | Overweight | Receives a slight premium versus peers |
| Lockheed Martin | Equal-weight | Given a wider discount due to EPS / FCF growth profile vs. peers |
| Northrop Grumman | Top Pick in Defense | Supported by premium portfolio outlook and historical trading patterns |
Updated Valuation Framework
Morgan Stanley applied a revised baseline valuation for the large defense primes, using roughly a “15% discount to the market on 2027 P/FCF.” Then, it layered company-specific premiums and discounts based on growth prospects and business mix.
Liwag noted that L3Harris received the baseline discount, aligning it with the sector’s reference level. General Dynamics earned a “slight premium,” reflecting a favorable view within the group. In contrast, Lockheed Martin received a steeper discount due to its EPS / FCF growth profile versus peers.
Northrop Grumman Holds Top Billing
Northrop Grumman remains Morgan Stanley’s Top Pick in Defense. The firm highlighted a premium portfolio outlook and the company’s historical trading characteristics as key supports for this conviction.
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