Defense stocks offer attractive value heading into 2026, Morgan Stanley says

Investing.com -- Morgan Stanley sees U.S. defense stocks as attractive going into 2026, arguing that valuations fail to reflect continued growth in the U.S. defense budget despite political uncertainty.

In an outlook note, analyst Kristine Liwag said the firm believes the sector “provides good value as stocks are not reflecting the growth in U.S. Defense budget.”

The firm expects demand to continue outpacing supply growth, extending trends that drove strong performance across aerospace and defense in 2025, according to Morgan Stanley.

Following a review of industry valuations, Morgan Stanley re-stacked its ratings across major defense primes.

The firm upgraded L3Harris Technologies and General Dynamics to Overweight, while downgrading Lockheed Martin to Equal-weight.

Morgan Stanley applied an updated baseline valuation that reflects a roughly “15% discount to the market on 2027 P/FCF” for defense primes, adjusting company-specific premiums and discounts.

Liwag added that the firm assigned L3Harris the baseline discount, while General Dynamics received a “slight premium” versus peers.

Lockheed Martin was assigned a wider discount due to its “relative EPS / FCF growth profile vs. peers,” according to the note.

Northrop Grumman remains Morgan Stanley’s Top Pick in Defense, supported by what it described as a premium portfolio outlook and historical trading characteristics.

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