RTX's Q2 Earnings Outlook: Navigating Defense Growth and Commercial Momentum Amid Valuation Concerns

Raytheon Technologies (RTX) has long been a bellwether for the aerospace and defense sectors, balancing the cyclical demands of commercial aviation with the steady growth of global defense spending. As the company prepares to report Q2 2025 earnings, investors are scrutinizing its ability to maintain momentum in both markets while addressing valuation concerns that have lingered despite recent outperformance. With mixed analyst forecasts and a stretched P/E ratio, the question remains: Is RTX a compelling buy ahead of its earnings release, or does its valuation require caution?

Earnings Outperformance, But Guidance Adjustments Signal Caution

RTX's Q2 2025 results, reported on July 22, 2025, showcased the company's operational resilience. Adjusted EPS came in at $1.56, surpassing the $1.45 analyst consensus and reflecting an 11% year-over-year increase. GAAP EPS also beat expectations at $1.22, driven by strong organic sales growth and a $218 billion backlog—$93 billion in defense and $125 billion in commercial. However, the company revised its full-year adjusted EPS guidance downward to $5.80–$5.95, below the previous $6.00–$6.15 range. This adjustment, attributed to tariffs and tax legislation, underscores the challenges of translating short-term strength into sustained earnings.

Valuation Metrics: A Tale of Two Perspectives

RTX's current P/E ratio of 44.06 (as of July 21, 2025) is 47% below its 10-year historical average of 82.43 but remains elevated relative to its 5-year average of 35.84. A PEG ratio of 2.93—well above 1—suggests the stock is trading at a premium to its earnings growth. Analysts have noted that while RTX's 11% EPS growth is robust, the valuation appears stretched, particularly against peers like Triumph Group (TGI), which trades at a P/E of 49.75.

The disconnect between fundamentals and valuation is further highlighted by the stock's performance. At $151.56, RTX trades above its 12-month average price target of $146.53, a 3.28% premium. This gap reflects optimism about its defense backlog and commercial recovery but also raises questions about whether the market is overbidding for future growth.

Segment Analysis: Defense as a Buffer, Commercial as a Catalyst

RTX's three core segments—Collins Aerospace, Pratt & Whitney, and Raytheon—paint a nuanced picture of growth sustainability.

• Collins Aerospace reported Q2 sales of $7.54 billion, with defense sales up 13% and commercial aftermarket up 12%. However, commercial original equipment (OE) sales declined 6%, a drag on long-term margins.
• Pratt & Whitney delivered a standout performance, with a 18% sales increase driven by a 31% surge in commercial OE and 8% growth in military sales. A four-week work stoppage, however, pressured operating profit.
• Raytheon saw a 4% sales increase, bolstered by land and air defense contracts. The divestiture of its cybersecurity unit masked a 10% growth in core defense sales.

The defense segment's $93 billion backlog offers a buffer against commercial headwinds, but tariffs and labor strikes could temper near-term earnings.

Analyst Outlook: Mixed Forecasts, but a “Moderate Buy” Consensus

Wall Street's view of RTX is divided but cautiously optimistic. Of 18 analysts surveyed, 12 assigned a “Buy” rating, 6 a “Hold,” and none a “Sell.” The average price target of $146.53 implies a slight discount to the current price, with extremes ranging from $182 (Citigroup) to $114 (Goldman Sachs). Recent upgrades from Citigroup, Morgan Stanley, and Deutsche Bank reflect confidence in RTX's backlog and strategic pivot toward higher-margin defense work.

Macro Factors: Defense Spending, Tariffs, and Geopolitical Risks

RTX's growth trajectory is inextricably linked to macroeconomic and geopolitical trends. Defense budgets in the U.S. and Europe are expanding, with RTX securing key contracts like the $1.1 billion AIM-9X production deal. However, tariffs on commercial aerospace could shave $850 million off operating profit in H2 2025. Geopolitical tensions, while boosting defense demand, also introduce volatility in international markets.

The commercial aerospace recovery, meanwhile, hinges on Boeing and Airbus's ability to meet pent-up demand. RTX's position as a Tier 1 supplier positions it to benefit from rising aircraft deliveries, but supply chain bottlenecks and the Pratt & Whitney labor strike remain near-term risks.

Investment Implications: A Calculated Buy?

RTX's Q2 results validate its strength in defense and commercial aerospace, but the valuation and guidance revisions warrant caution. The stock's forward P/E of 24.1x for 2025 is more attractive than its trailing P/E of 42.53x, suggesting potential for normalization as near-term challenges resolve.

For investors, the decision to buy hinges on two factors:
1. Defense Backlog Durability: RTX's $93 billion defense backlog provides a floor for earnings, but investors must assess whether recent contract wins offset the impact of tariffs and tax changes.
2. Valuation Realism: A PEG ratio above 1 indicates overvaluation, but RTX's long-term growth in defense and its dividend yield of 1.8% could justify a premium for risk-tolerant investors.

Final Verdict: RTX is a compelling long-term hold for those comfortable with its valuation premium and confident in the durability of defense spending. However, the mixed analyst forecasts and near-term headwinds suggest a “Buy” only at a price closer to the $140–$145 range, where the stock's fundamentals align more closely with its valuation.

In the end, RTX's ability to navigate its dual market exposure—defense's stability and commercial's volatility—will define its investment appeal. For now, the stock remains a high-conviction play for those who believe in its strategic pivot toward defense and its capacity to execute on a $218 billion backlog.