Sector Rotation and Momentum in the U.S. Stock Market: High-Conviction Long Positions in Aerospace and Homebuilding Stocks

The U.S. stock market in 2024-2025 has been shaped by a dynamic interplay of macroeconomic forces, geopolitical tensions, and sector-specific catalysts. Investors seeking high-conviction long positions must navigate these forces through strategic sector rotation and momentum analysis. This article examines two critical sectors-aerospace/defense and homebuilding-to identify opportunities aligned with current trends and long-term structural shifts.

Aerospace and Defense: A Magnet for Momentum

The defense sector has emerged as a standout performer, driven by sustained government spending, technological innovation, and global instability. According to a report by , defense contractors like Lockheed Martin (LMT), Boeing (BA), and Northrop Grumman (NOC) are benefiting from a $94 billion backlog at Northrop Grumman and Pentagon priorities such as modernizing the nuclear triad and advancing AI-driven cybersecurity systems. Lockheed Martin, in particular, has solidified its position as a global leader in aerospace and missile systems, with robust R&D investments ensuring its relevance in an era of escalating defense budgets.

Boeing, while grappling with commercial aviation challenges, remains a compelling long-term play due to its defense segment, which includes lucrative contracts for military aircraft and space exploration initiatives.

Northrop Grumman's focus on stealth technology and hypersonic systems further cements its role in a sector where geopolitical risks justify elevated valuations. For investors, these companies represent a blend of defensive resilience and growth potential, particularly as defense spending is projected to rise in response to conflicts in the Middle East and Asia-Pacific regions.

Homebuilding: Cyclical Challenges and Strategic Hurdles

In contrast, the homebuilding sector has faced headwinds from persistently high mortgage rates and weak consumer demand. KB Home (KHC), for instance, reported strong Q4 2025 earnings ($1.92 per share, $1.69 billion revenue) but slashed its 2026 revenue guidance by 3.9% due to affordability crises and a 31.9% year-on-year decline in backlog. Similarly, Lennar (LEN) and D.R. Horton (DHI) have seen stock declines following poor earnings from peers like Hovnanian, reflecting broader industry fragility.

The sector's performance is inherently cyclical, with interest rates and housing affordability acting as key levers. As noted by , KB Home's pivot to a build-to-order strategy and cost-cutting measures may mitigate near-term risks, but long-term recovery hinges on a Fed pivot to rate cuts-a scenario that remains uncertain. For now, homebuilders appear more suited to a defensive or opportunistic allocation rather than a core long position.

Sector Rotation Strategies: Balancing Risk and Reward

The divergence between aerospace/defense and homebuilding underscores the importance of sector rotation. In a high-risk, high-reward framework, defense stocks offer asymmetric upside: their performance is less correlated with interest rates and more tied to geopolitical catalysts, which are increasingly hard to predict. Conversely, homebuilders require a patient, macro-driven approach, with allocations contingent on Fed policy and housing market normalization.

Investors should consider a barbell strategy: overweighting aerospace/defense for momentum-driven growth while maintaining a smaller, hedged position in homebuilders to capitalize on potential cyclical rebounds. This approach aligns with historical patterns where defense stocks outperform during periods of elevated global risk, while homebuilders thrive in low-rate environments.

Conclusion

The U.S. stock market's 2024-2025 trajectory highlights the need for disciplined sector rotation. Aerospace/defense stocks like Lockheed Martin and Northrop Grumman offer compelling long-term value, underpinned by structural demand and technological innovation. Meanwhile, homebuilders face near-term headwinds that limit their appeal for aggressive long positions. By prioritizing sectors with strong momentum and aligning allocations with macroeconomic signals, investors can navigate volatility while positioning for durable returns.