Where to Now Post Sell-Off

Research evidence excerpt

Where to Now Post Sell-Off

Equity Research

Price Target Change — July 8, 2026

Aerospace & Defense

Now at 15% Discount; Likely Accelerating Growth to Come

Our Call David Strauss

Despite budget growth and still heightened geopolitical backdrop, defense has Equity Analyst | Wells Fargo Securities, LLC

David.Strauss@wellsfargo.com | 212-214-8052

meaningfully underperformed most recently. Large outlays gap implies outgrowth relative

Joshua Kornto consensus expectations over next several years.

Associate Equity Analyst | Wells Fargo Securities, LLC

Joshua.T.Korn@wellsfargo.com | 212-214-6421

Even without assuming anything for reconciliation, the budget has increased ~25% Ben Tomick

over the last several years including modernization ~65%. Despite this, the stocks have Associate Equity Analyst | Wells Fargo Securities, LLC

performed roughly in line (2021-now), most recently outperforming in anticipation of Ben.Tomick@wellsfargo.com | 332-295-4224

the FY27 budget request before quickly giving back all the upside. Prior periods of large

budget growth such as now have seen the stocks meaningfully outperform.

Typically the defense stocks work in two distinct phases of the cycle, separated by a

period of underperformance. The first is relative valuation driven on accelerating budget

growth as the group trades up from a discount to the market to in line to a premium,

while the second is earnings growth driven on accelerating outlays and revenue growth.

In between, relative valuation compresses back to a discount to the market as it takes

several years for the budget growth to actually materialize.

Defense now trades at 18x N12M P/E on average, equivalent to a ~15% discount to

the market, down from small premium a few months ago. Typically defense only gets