Investing.com -- Morgan Stanley maintained a constructive outlook on the aerospace and defense sector ahead of second-quarter earnings, citing resilient commercial aerospace demand, improving aircraft production, and favorable long-term defense spending trends, while becoming more selective after recent stock volatility and valuation shifts.

The brokerage reiterated positive views on commercial aerospace, defense and space, highlighting durable aftermarket demand driven by sustained fleet utilization, low aircraft retirement rates, constrained maintenance capacity and continued engine maintenance needs. It also said Boeing's production recovery is gaining momentum, with the 737 MAX running at 47 aircraft per month and further certification milestones expected to support the commercial aerospace outlook.

In defense, Morgan Stanley said investors continue to underestimate the likelihood of a roughly $1.1 trillion U.S. fiscal 2027 base defense budget, arguing that supply-chain improvements and expanding missile production capacity should provide further upside for the sector. The firm also expects space companies to benefit from upcoming launch milestones, improving order trends and NASA's commercial International Space Station procurement.

Reflecting changing valuations rather than weakening fundamentals, Morgan Stanley downgraded Loar Holdings and TransDigm to Equal-weight, while cutting CAE and Voyager Technologies to Underweight. At the same time, it named FTAI Aviation as its top commercial aerospace pick, Northrop Grumman as its preferred defense stock and HawkEye 360 as its top space investment.

The brokerage also revised several price targets, lowering targets for companies including Honeywell Aerospace, VSE, Textron, StandardAero, Loar and TransDigm, while raising targets for Heico, Curtiss-Wright and Moog. It said the expanding universe of publicly traded aerospace and defense companies has increased investment opportunities but also requires greater selectivity.