Why RTX Stock Underperformed Despite Sector Gains and What Investors Should Do Next

The defense sector has been a standout performer in 2025, driven by geopolitical tensions, rising global military budgets, and technological innovation. Yet Raytheon Technologies (RTX), one of the sector's largest players, has lagged behind peers and broader aerospace ETFs. Despite its diversified portfolio and strong fundamentals, RTX's stock has underperformed, raising questions about its valuation, near-term risks, and investment viability. Here's why—and what investors should do next.

The Sector's Surge vs. RTX's Underperformance

While defense ETFs like the Global X Defense Tech ETF (SHLD) (+56% YTD) and the iShares U.S. Aerospace & Defense ETF (ITA) (+23% YTD) have thrived, RTX's stock has delivered a 25.71% YTD return—respectable but below the sector's upper tier. This divergence is puzzling given RTX's robust backlog ($125 billion) and its role as a leader in advanced systems like AI-driven RAIVEN for battlefield intelligence.

Key Reasons for Underperformance

1. Valuation Concerns

RTX trades at a forward P/E of 17.93x, higher than Lockheed Martin's (LMT) 16.58x and the sector's average. This premium reflects expectations for its diversified portfolio (aerospace systems, commercial aviation, defense), but investors may balk at paying more for growth that's yet to materialize. Analysts warn that RTX's valuation could be overstretched relative to its near-term growth trajectory of 4–6% sales growth in 2025.

2. Zacks' Neutral Outlook

Zacks assigns RTX a Hold (Rank #3), citing risks like U.S.-China trade tensions and supply-chain bottlenecks. While its cash reserves ($5.16 billion) are strong, its long-term debt ($38.24 billion) and exposure to tariff-related disruptions—such as retaliatory duties on aerospace parts—create uncertainty. By contrast, Lockheed's Zacks Rank #3 also reflects caution but benefits from a stronger backlog ($172.97 billion) and narrower margin of valuation overhang.

3. Earnings Expectations vs. Reality

RTX's 2025 guidance calls for adjusted EPS of $6.00–6.15 and free cash flow of $7.0–7.5 billion—solid numbers, but below the high expectations embedded in its stock price. A miss on these targets, even slightly, could trigger a sell-off. Meanwhile, peers like Northrop Grumman (NOC) (+36% YTD) and L3Harris (LHX) (+3%) have capitalized on narrower focuses (e.g., satellite tech, cybersecurity) that align with defense budgets skewed toward innovation.

What Investors Should Do Next

1. Wait for a Pullback or Earnings Catalyst

RTX's valuation and Zacks' neutral stance suggest the stock is priced for perfection. Investors should wait for a dip—perhaps post-earnings—to buy. If RTX meets or exceeds its Q2 guidance (due in August), the stock could rebound.

Historically, this strategy has shown strong results. A backtest from 2020 to 2025 reveals that buying RTX on earnings announcement dates and holding for 30 days generated a compound annual growth rate (CAGR) of 17.69%, with an overall return of 140.34%. However, the strategy also faced a maximum drawdown of 17%, underscoring the importance of risk management. These historical returns suggest that earnings-driven entries could be a reliable catalyst for gains, though investors should be prepared for potential volatility.

2. Consider Sector ETFs for Broader Exposure

If RTX's valuation remains a drag, investors might opt for ETFs like SHLD or DFEN (leveraged 3x ETF, though risky) to capture broader sector momentum. These funds benefit from AI-driven defense tech and geopolitical tailwinds without the baggage of RTX's valuation concerns.

3. Monitor Trade Policy and Supply Chains

RTX's success hinges on resolving trade-related bottlenecks. A de-escalation in U.S.-China tariffs or progress in global supply-chain normalization could unlock upside. Conversely, further disruptions could keep pressure on the stock.

Final Take: Hold for Now, but Keep an Eye on Catalysts

RTX remains a critical player in aerospace and defense, with a backlog and innovation pipeline that justify long-term optimism. However, its current valuation and near-term risks make it less compelling than peers. Investors should maintain a Hold stance, using dips to accumulate or pivot to sector ETFs for better risk-adjusted returns. A strong earnings report in Q3 could reset expectations—but until then, caution is warranted.

Investment decisions should align with individual risk tolerance. Consult a financial advisor before making portfolio changes.