Citi Calls Aerospace & Defense Stocks 'Close to Major Tactical Bottom' After Brutal 20% Selloff

Citi aerospace and defense analyst John Godyn said in a note on Wednesday that many aerospace and defense stocks are 'close enough to a major tactical bottom' to advocate for selective dip-buying, following a brutal selloff that has pushed the S&P 500 Aerospace & Defense index down roughly 20% from its summer high. The decline has coincided with rising odds on Polymarket that Democrats will take the Senate, with the implied probability topping 64%.

Godyn acknowledged that the third quarter earnings season is set up to be volatile but argued that the market is disconnecting from a growing military spending pipeline. He opened a Positive Catalyst Watch on RTX and HII, and reiterated HWM as his top OE-levered pick. 'Both aerospace and defense have simultaneously experienced major pullbacks and, while 3Q26 is set up to be a volatile EPS season, we think that we are close enough to a major tactical bottom in many stocks to again advocate for buying the dip selectively,' Godyn wrote. He also noted that market positioning is more positive in aerospace names than in defense names, where the funding debate continues.

The call comes as investors weigh political uncertainty ahead of next month's midterms against a strong multi-year defense spending outlook. While Citi sees opportunity, stepping in now risks catching a falling knife if Democratic gains lead to spending cuts or delays. The bank's supplier survey of 100 companies supports its conviction in select names, but the broader sector remains sensitive to election outcomes and fiscal policy debates.