Investing.com -- Morgan Stanley upgraded its view on the U.S. defence sector to "Attractive" from "In-line" on expectations of a $1 trillion defence budget in fiscal 2026 and rising international arms exports, calling recent developments a turning point for industry sentiment.

The firm named Northrop Grumman (NYSE:NOC) as its top pick, citing strong alignment with enduring Pentagon priorities such as nuclear modernization and space.

It also upgraded Lockheed Martin (NYSE:LMT) to “Overweight” from “Equal-weight,” while downgrading General Dynamics (NYSE:GD) to “Equal-weight.”

Defense stocks stand to gain from increased U.S. spending, rising export demand, and limited exposure to tariffs, Morgan Stanley believes, pointing to the sector’s largely domestic supply chains and cost-plus contracts.

The firm expects increased defense exports could help U.S. trade imbalances and sees international demand for platforms like the F-35 as resilient despite some geopolitical concerns.

For Lockheed, it sees improving sentiment after recent charges, with international exposure making the company a likely beneficiary of global demand.

Morgan Stanley raised its price target on the stock to $575 from $525.

General Dynamics was cut due to exposure to tariffs through its Gulfstream jet business and risk from federal consulting contract cuts under the government’s ongoing cost-review initiative, known as DOGE.

Its price target was lowered to $305 from $315.

Northrop’s growing international footprint, improved outlook for the B-21 bomber, and robust free cash flow potential support a raised price target of $625, up from $580.

Morgan Stanley said the firm’s defense portfolio remains “among the most resilient” in the industry.

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