Sometimes the market punishes a company for doing well, and then punishes it a little more for not doing well enough in the future.
But most of us know that the market doesn’t really care about anything else that is not numbers. Many would tag it as foul play from the market, but at the end of the day, the market doesn’t care about our feelings toward is at hand.
That’s roughly what has happened to RTX Corp (RTX) on April 22, 2026. The aerospace and defense giant reported a genuinely strong first quarter. Sales up, earnings up, guidance raised, and the stock fell 4.4% anyway. Investors weren’t reacting to what RTX did. They were reacting to what RTX might face in 2027, when elevated oil prices and geopolitical uncertainty could cool commercial aftermarket demand.
Morgan Stanley (MS) watched that selloff and arrived at a different conclusion than the market did.
MS trimmed its price target on RTX to $220 from $235. A mark-to-market adjustment, not a change of heart, while reiterating its Overweight rating and maintaining RTX as its top pick in the entire aerospace sector. The firm’s message to investors was direct.
“We view the pullback as a buying opportunity,” Morgan Stanley said in its note, “as upside is underappreciated and valuation is attractive.”
RTX Chairman and CEO Chris Calio set the tone heading into that debate.
“RTX delivered a very strong start to 2026 with organic sales and adjusted operating profit growth across all three segments, driven by our continued focus on execution and delivering our backlog,” Calio said in the Q126 results statement.
RTX’s Q1 2026 earnings beat across every segment
The numbers RTX posted for the first quarter of 2026 were not ambiguous. According to the RTX’s April 21 earnings release:
- Sales of $22.1 billion, up 9% year over year and up 10% organically
- Adjusted EPS of $1.78, up 21% year over year
- Operating cash flow of $1.9 billion; free cash flow of $1.3 billion
- Company backlog of $271 billion, including $162 billion commercial and $109 billion defense
RTX also raised its full-year 2026 outlook. Adjusted sales guidance was lifted to $92.5 to $93.5 billion from $92.0 to $93.0 billion. Adjusted EPS guidance moved to $6.70 to $6.90, up from $6.60 to $6.80. Free cash flow guidance of $8.25 to $8.75 billion was confirmed unchanged, according to the earnings release.
That’s a beat-and-raise quarter by any conventional measure. Yet RTX fell 4.4% on the day, underperforming the S&P 500‘s 0.6% decline by a wide margin, according to Morgan Stanley’s note. GE Aerospace, which reported the same day, fell 5.6% under similar investor logic.
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The market’s concern centers on 2027. Elevated oil prices stemming from the Iran war are raising questions about airline profitability, capacity discipline, and ultimately whether demand for commercial engine maintenance and aftermarket services will soften heading into next year.
RTX’s guidance raise was modest relative to the strength of the beat, and management’s cautious commentary on certain aftermarket segments, particularly provisioning and modifications and upgrades, gave investors enough reason to worry.
Morgan Stanley’s view is that this concern, while not irrational, is overstated and timing-related rather than structural.
Why Morgan Stanley’s $220 RTX target still points bullish
The price target reduction from $235 to $220 deserves context. Morgan Stanley is clear that the cut reflects a mark-to-market valuation adjustment, not a downgrade in conviction.
The bank’s $220 target is derived by applying a roughly 30 times multiple to its 2027 estimated free cash flow per share. That’s in line with the average 2027 price-to-free-cash-flow multiple of large-cap commercial aerospace peers Boeing (BA) and GE Aerospace (GE), according to the firm’s note.
That multiple carries a four-turn discount to GE and a four-turn premium to Northrop Grumman, reflecting RTX’s positioning between pure defense and pure commercial aerospace.
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Morgan Stanley flags what it views as a compelling valuation argument: RTX currently trades at approximately a 24% discount to GE on a 2027 price-to-free-cash-flow basis, according to the firm. For a company Morgan Stanley describes as a “high-quality, multi-year growth story with multiple levers for upside,” that discount is the opportunity.
The bank modestly raised its 2026 adjusted EPS estimate to $6.90 from $6.80, following the first-quarter results and updated company guidance. Revenue estimates for 2026 through 2028 were increased by approximately 50 basis points, and business segment operating profit was raised by roughly 80 basis points in 2026, per Morgan Stanley’s updated model.
Raytheon’s defense momentum at RTX is the growth driver
The market isn’t fully pricing in on this one. While commercial aerospace dominates the near-term narrative around RTX, Morgan Stanley’s most pointed observation is about what the market is missing on the defense side.
Raytheon delivered strong outperformance in the first quarter, as seen in Morgan Stanley’s note, supported by strong demand across its portfolio. MS sees clear upside potential tied to framework agreements with the Department of War, capacity expansion, and the approximately $1.5 trillion fiscal year 2027 budget request. None of which is currently embedded in RTX’s guidance.
Related: Morgan Stanley resets bets on defense stocks amid war
That’s a meaningful distinction. RTX’s backlog already stands at $109 billion on the defense side alone, according to MS’s earnings release statement. As contracts tied to the DoW budget request become finalized and out-year visibility improves, Morgan Stanley expects defense momentum to become an increasingly visible earnings driver. In fact, for this one, the market isn’t yet paying for.
On the commercial aerospace side, the fundamental picture remains intact despite the 2027 noise. RTX benefits from a young installed base of engines requiring consistent maintenance, repair, and overhaul activity, strong original equipment manufacturer production trends, and elevated shop visit demand from the Pratt & Whitney GTF engine fleet.
RTX selloff reveals how investors view aerospace in 2026 trends
RTX’s Q1 selloff signals a broader aerospace shift. Investors are discounting the sector amid geopolitical tension, Iran-driven energy volatility, and low confidence in 2027 earnings. GE Aerospace fell more than RTX Corporation despite strong results, showing a blanket discount on commercial exposure as 2027 visibility weakens.
Morgan Stanley argues this creates an entry point. RTX’s core drivers, defense demand, a young engine base, steady MRO, and a $271B backlog, remain intact. Near-term pressure from Pratt OE margins and Collins mix is manageable. At 30x 2027 FCF and a 24% discount to GE, RTX stands out as undervalued.
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