3 Defense Stocks Poised to Surpass Q1 Earnings Expectations

Zacks expects the Aerospace sector’s Q1 2026 earnings to rise 10.9% on 9.9% higher revenue, supported by elevated defense spending, large backlogs, and a rebound in commercial aviation. Curtiss-Wright, Huntington Ingalls, and Redwire are highlighted as potential earnings beats, with consensus EPS estimates of $3.32, $3.70, and a 16-cent loss, respectively, alongside positive Earnings ESP readings. Headwinds from labor shortages, supply-chain issues, and tariffs may temper some results, but the overall setup remains constructive for defense names.

Analysis

The market is likely underestimating how much of this quarter’s outperformance is already embedded in defense primes versus the real optionality in smaller, higher-beta names tied to space and advanced systems. CW looks like the cleanest quality compounder: diversified end markets and aftermarket exposure make its earnings less binary, so a beat would likely translate into multiple expansion rather than just a one-day pop. HII is the most operationally leveraged to execution on large programs, but it is also the most exposed to any production hiccup, labor bottleneck, or margin noise; that makes it a lower-conviction earnings trade and more of a months-long catalyst story than a pure event trade. RDW stands out as the asymmetric name because the market may still be discounting financing risk, while improving balance-sheet flexibility and capacity expansion can create operating leverage if contract wins convert into revenue faster than expected.

The second-order effect to watch is supply-chain and labor inflation: if tariffs and skilled labor shortages are pressuring the sector, the beneficiaries may not be the prime contractors but niche suppliers with pricing power and specialized IP. That argues for relative strength in companies with software, mission-critical components, or unique manufacturing capability, and relative weakness in firms whose earnings depend on flawless execution of long-cycle build programs. Over the next 1-2 quarters, the key question is whether backlog converts into margin expansion or merely revenue recognition; if margins do not inflect, the sector can still outperform on estimates but fail to sustain higher valuations.

Consensus appears to be focused on the geopolitical demand uplift, but the bigger hidden variable is mix: higher defense budgets do not automatically mean higher near-term EPS if working capital intensifies and pass-through costs lag. The most contrarian read is that RDW’s loss profile may compress faster than expected if capital structure relief and factory utilization improvements arrive together, making it the best torque play. Conversely, HII may be the classic ‘good backlog, mediocre follow-through’ name where expectations are already fair, so any disappointment could trigger de-rating despite the positive macro backdrop.

Key Decisions for Investors

• Long CW into the print or on post-earnings weakness; target a 2-4 week horizon. Favor upside participation over outright earnings surprise capture because the setup supports multiple expansion if guidance is constructive.
• Use RDW as the highest-upside event trade: buy shares or call spreads for a 1-3 month horizon. Risk/reward is attractive if backlog conversion and balance-sheet progress shift the market from financing concern to operating leverage.
• Avoid chasing HII pre-earnings; if long, hedge with short-dated calls or size small. This is the most execution-sensitive name in the group, so it is better suited for a wait-for-confirmation approach after the print.
• Pair trade: long CW / short HII over the next 1-2 months. CW has cleaner margin quality and less program-specific execution risk, while HII is more vulnerable to cost and schedule slippage.
• For a broader sector expression, go long a defense basket tilted to software/space enablers and underweight labor-intensive shipbuilders. The thesis is that pricing power and unique IP will outperform pure backlog exposure if supply-chain friction persists.