Aerospace and defence are emerging as key beneficiaries of industrial outperformance, supported by tight supply chains, cyclical recovery and rising global defence budgets. Investors are increasingly focused on companies positioned to benefit from both commercial aerospace demand and renewed military spending.
BNN Bloomberg spoke with Evelyn Chow, senior research analyst at Neuberger Berman, about why she is leaning into industrials through aerospace and defence exposure, highlighting cyclical recovery, free cash flow acceleration and a global shift toward modernized defence capabilities.
Key Takeaways
- Industrials have outperformed the broader market over the past year, driven by strong revenue growth and resilient demand.
- Aerospace is benefiting from a post-pandemic recovery as aircraft backlogs remain large and deliveries accelerate.
- Free cash flow growth is improving across aerospace manufacturers as production stabilizes and charges decline.
- Global defence spending is rising as governments adapt to new deterrence strategies and modern warfare technologies.
- Increased focus on missile defence, autonomous systems and advanced defence technology is reshaping long-term sector opportunities.
Read the full transcript below:
ANDREW: It’s time for Hot Picks in aerospace and defence. That’s what’s on the menu today. Our guest has ITT as her top selection. She believes the company will benefit from its acquisition of equipment maker SPX Flow. We’re joined by Evelyn Chow, senior research analyst at Neuberger Berman. Thank you very much for joining us, Evelyn.
EVELYN: Thank you, Andrew. It’s great to be here. In this really volatile time, where we’ve seen drawdowns in TMT and a lot of macro cross-currents, one area that really stands out to me as a global equity portfolio manager is industrials, and specifically aerospace and defence.
You might be surprised to know that over the last 12 months, industrials have actually outperformed the XLI by over 1,000 basis points. That’s been driven by a confluence of factors, including better-than-expected top-line growth, very capable navigation of the tariff environment, a broadening cyclical recovery trade and, last but not least, extremely tight supply-and-demand dynamics, especially within commercial aerospace.
ANDREW: Sorry, I wanted to cut you off there because I got confused by something you said. XLI is an ETF that tracks industrial stocks in the United States. That’s what you mean?
EVELYN: That’s exactly right.
ANDREW: And what did you say about its performance?
EVELYN: It has outperformed the S&P 500 by over 1,000 basis points in the last 12 months.
ANDREW: Thank you. Sorry to cut you off again. We’re tight for time. Can you tell us about ITT? What do they do, and what attracts you to the stock?
EVELYN: ITT is not a household name, but it is a core portfolio holding. This is a smidcap compounder that is dominant in industrial pumps, aerospace connectors and defence electronics.
I see a mid-teens earnings growth algorithm over the next few years, driven by organic upside surprise and, as you noted, Andrew, its impending acquisition of SPX Flow, which will make the company a dominant player in flow control and process markets.
ANDREW: How much of the business is defence? Is it fair to call it a defence stock?
EVELYN: Aerospace and defence probably make up around 10 to 15 per cent of the current revenue base, but that portion is accelerating at a very high level. The company is leveraged to the widebody original equipment recovery, as well as accelerating defence spending not just in the U.S., but globally.
ANDREW: A better-known name in defence is Boeing. It has a huge civil business, but tell us about its defence franchise and what attracts you to the name.
EVELYN: I really think it’s both. Boeing has a strong defence business, and Boeing Defense has seen a significant step-down in the amount of charges it has taken over the last few years. That business is on a path toward breakeven and eventually better margins over time.
The broader call on Boeing stems from the post-COVID original equipment recovery. There are still a lot of planes in backlog that need to be delivered. Boeing is finally reaching cruising altitude.
To frame that, I think about roughly $13 billion in free cash flow within three years and about $15 billion within five years, up from low single-digit billions today. I see a significant acceleration in free cash flow driven by its defence, commercial OE and services businesses.
ANDREW: Finally, Lockheed Martin, a major defence name. What’s your bull case?
EVELYN: Defence primes are ready for prime time. Defence spending is accelerating not just because of geopolitical conflict, but because there’s recognition we’re entering a new paradigm of deterrence.
That’s reflected in discussions around a US$1.5 trillion defence budget in the U.S. In Japan, we’ve seen a landslide supermajority victory for the LDP, where the prime minister is very supportive of accelerating defence spending. That doesn’t even capture what’s happening across NATO, particularly in Germany and Poland, which are ramping defence spending.
Lockheed is a bellwether that had some missteps in 2025, but this is the year it regains momentum. I see upside revisions to estimates, supported by a strong franchise and missile interceptor demand. Framework agreements with the U.S. government are accelerating production capacity, and Lockheed is positioned to benefit in a material way.
ANDREW: Looking at its website, they highlight missile defence, but also unmanned and autonomous maritime vehicles.
EVELYN: It’s a whole new world, Andrew. Defence tech is becoming broader and more sophisticated. These are more elegant solutions to deterrence than we’ve seen before.
ANDREW: The war in Ukraine, tragic as it is, has shown how relatively inexpensive drones can be decisive on the battlefield.
EVELYN: Absolutely. Unmanned and autonomous systems are a critical area of investment globally. They will still be complemented by highly complex manned systems needed to mount effective defence across all theatres.
ANDREW: Evelyn, thank you very much.
EVELYN: Thank you.
| DISCLOSURE | PERSONAL | FAMILY | PORTFOLIO/FUND |
|---|---|---|---|
| ITT | N | N | N |
| BA NYSE | N | N | N |
| LMT NYSE | N | N | N |
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This BNN Bloomberg summary and transcript of the Feb. 9, 2026 interview with Evelyn Chow are published with the assistance of AI. Original research, interview questions and added context was created by BNN Bloomberg journalists. An editor also reviewed this material before it was published to ensure its accuracy and adherence with BNN Bloomberg editorial policies and standards.
