Defensive Positioning in Aerospace & Defense Amid U.S. Manufacturing PMI Downturn

The U.S. manufacturing sector is showing signs of fragility. The July 2025 Markit Manufacturing PMI reading of 49.5—far below the expected 52.6—marks the first contraction in factory activity since December 2024. This decline reflects slowing production, weaker new orders, and a retreat in employment, signaling a broader economic slowdown. Coupled with the ISM Manufacturing PMI's stagnation below 50, the data underscores a sector grappling with inflationary pressures, supply chain bottlenecks, and geopolitical trade tensions. For investors, this environment demands a shift toward defensive positioning. Historically, the aerospace and defense (A&D) sector has emerged as a resilient haven during such periods, offering a compelling case for overweighting.

The PMI Miss: A Harbinger of Economic Softness

The July Markit PMI miss of 49.5 highlights a critical inflection point. Manufacturing activity, which had briefly rebounded to a 37-month high of 52.9 in June, has now entered a contractionary phase. Key drivers include a sharp drop in new orders—the first decline in 2025—and a 17-month slowdown in production growth. Employment and inventory levels also fell, exacerbating concerns about a near-term recession. These trends align with the ISM PMI's marginal improvement to 49.0 in June, which still signals a shrinking sector.

The contraction is not merely cyclical but structural. Tariff policies, persistent inflation, and global supply chain disruptions have eroded margins and delayed output. For instance, the Red Sea crisis and droughts in Central America have disrupted shipping and raw material flows, compounding costs for manufacturers. This environment mirrors the 2020 pandemic-induced downturn, where manufacturing PMIs plunged but the A&D sector demonstrated unexpected resilience.

Aerospace & Defense: A Historical Safe Haven

The A&D sector's ability to thrive during economic contractions is rooted in its dual reliance on commercial and defense demand. During the 2020 pandemic, while global manufacturing PMIs slumped, A&D companies maintained steady revenue streams. By 2024, the sector's global revenue hit a record $922 billion, driven by surging defense budgets and long-term contracts.

Defense spending, in particular, acts as a stabilizer. Global defense budgets rose by 9% in 2024, with the U.S. Department of Defense requesting a $849.8 billion fiscal 2025 budget. This focus on cyber, space, and hypersonic technologies ensures consistent investment, even during economic downturns. For example, the DoD's $163.4 million allocation for hypersonic R&D in fiscal 2025 illustrates how strategic priorities insulate A&D firms from short-term economic volatility.

The space economy further amplifies this resilience. Public and private investments in satellite, launch, and deep-space missions surged in 2024, with the sector valued at $570 billion. Unlike traditional manufacturing, space ventures are less tied to consumer demand and more aligned with long-term national security and commercial goals. This divergence creates a buffer against PMI-driven contractions.

Tactical Advantage: Overweighting A&D in a Downturn

Historical backtests reinforce the case for overweighting A&D during economic softness. During the 2020 PMI contraction, A&D indices outperformed the S&P 500 by 12 percentage points. Similarly, in 2024, while manufacturing PMIs dipped, A&D companies like Boeing and Raytheon maintained double-digit revenue growth. This outperformance is attributed to two factors:

1. Government Spending Resilience: Defense contracts are typically multiyear, ensuring cash flow stability. For example, the U.S. military's focus on unmanned systems and AI-driven logistics creates a demand floor.
2. Market Behavioral Patterns: A&D stocks are less correlated with cyclical sectors. During the July 2025 PMI miss, while industrials and consumer discretionary sectors underperformed, A&D ETFs like XLA held steady, reflecting investor flight to perceived safety.

Moreover, the sector's adaptability to digital transformation enhances its appeal. AI and machine learning are now embedded in A&D operations, from predictive maintenance to supply chain optimization. These technologies reduce downtime and improve margins, further insulating the sector from cost inflation.

Investment Strategy: Positioning for Resilience

For investors, the current PMI miss presents an opportunity to tilt portfolios toward A&D. Key considerations include:

• ETF Allocation: Overweighting defensive ETFs like XLA or PPA (Pacer Aerospace & Defense ETF) to capture sector-wide gains.
• Individual Stocks: Targeting companies with strong government ties, such as Lockheed Martin (LMT) or Northrop Grumman (NOC), which benefit from DoD modernization budgets.
• Space Subsector Exposure: Investing in firms like SpaceX (via private channels) or satellite infrastructure providers, which are capitalizing on the $570 billion space economy.

Conclusion: A Sector Built for Uncertainty

The U.S. manufacturing sector's contraction, as signaled by the July PMI miss, demands a reevaluation of risk exposure. While traditional manufacturing and industrials face headwinds, the aerospace and defense sector offers a rare combination of resilience, long-term growth, and government-backed stability. By leveraging historical performance patterns and current fiscal tailwinds, investors can position themselves to capitalize on A&D's defensive strengths—turning economic uncertainty into a strategic advantage.

In a world where manufacturing PMIs fluctuate and recessions loom, the A&D sector stands as a testament to the power of strategic foresight and long-term planning. For those seeking shelter in a storm, the skies have never looked clearer.