Analysis of Driving Factors for the Leading Rally in the Aerospace & Defense Sector and Sustainability of Sector Rotation

Based on the latest market data and research reports, I will systematically analyze the driving factors for the leading rally in the aerospace & defense sector and the sustainability of sector rotation.

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Technological breakthroughs in the commercial space sector are the core support logic for this round of market rally. Since SpaceX achieved first-stage rocket recovery in 2015, China’s space “national team” and private players have been making dual efforts. After a decade of catch-up, they will officially enter the concentrated “breakthrough phase” for large-capacity reusable rockets in 2025-2026 [1].

• In December 2025, Landspace’s Zhuque-3 Y1 carrier rocket was successfully launched into orbit, achieving key technological breakthroughs in reusable launch vehicles based on stainless steel airframes and liquid oxygen-methane propellants [1]
• Subsequent models including Tianlong-3 and Zhishenxing-1 will conduct intensive maiden flights to continuously verify technological breakthrough results
• After the second phase of the Hainan Commercial Space Launch Site is expected to be completed by the end of 2026, its 4 launch pads will have an annual launch capacity exceeding 60 missions [2]

Strong policy support has become an important driver for the sector’s market rally:

Policy Initiative	Impact
Establishment of the Commercial Space Department under the China National Space Administration	Coordinates and integrates the development of commercial space
Adjustment of STAR Market listing standards	Clearly supports listing and financing for commercial rocket enterprises [2]
15th Five-Year Plan Proposal	Lists commercial space as a strategic emerging industry [2]
Launch of special development funds	Safeguards technological breakthroughs in the industry [1]

China Securities Co., Ltd. points out that catalytic factors such as enterprise IPOs, intensive maiden rocket flights, and accelerated constellation networking will follow one after another in 2026 [1]. Looking at specific orders:

• China Satellite Co., Ltd. undertakes 70% of the networking tasks for the GW Constellation, with commercial space backlog orders exceeding RMB 14 billion in 2025, scheduled for delivery through 2027 [3]
• 2026 revenue is projected to reach RMB 6.5-7.2 billion, representing a year-on-year growth of 15%-25% [3]
• Accelerated order delivery and revenue recognition at the end of the year are expected to drive quarter-on-quarter performance improvements for some defense enterprises in Q4 [4]

Positive signals on the capital front are particularly notable:

• ETF Performance
  : In the past month, 5 satellite-themed ETFs have seen an interval increase of over 30%, while 3 general aviation-themed ETFs have risen by over 20% [4]
• Leveraged Capital
  : In December 2025, net purchases reached nearly RMB 70 billion, with the electronics and aerospace & defense sectors both receiving over RMB 10 billion in net purchases [5]
• Fund Shares
  : The share of a certain satellite-themed ETF surged by approximately 2.3 billion units in a single month, with net inflows exceeding RMB 3.2 billion [4]

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Dimension	Analysis
Industry Trend	Commercial space will gradually shift from concept speculation to performance realization, with 2026 regarded as the “Alpha Year” [6]
Policy Window	The hard constraint of securing orbital resources for networking forms a policy catalysis window
Technology Verification	Multiple models of private reusable rockets will conduct maiden flights or recovery verification in late 2025 and 2026
Capital Shift	The valuation system is shifting from grand narratives to order visibility, strengthening the fundamental pricing logic [6]

: Although the market believes that the current elevated valuation is not a bubble but a liquidity premium for a high-growth track, investors should remain vigilant against short-term correction risks [2].

: It is worth noting that the aerospace & defense sector saw net outflows of over RMB 9.6 billion in the morning session on January 7, indicating divergence among capital within the sector [7].

: Financial pressures such as low ROIC, negative cash flows in three categories, and year-on-year declines in gross profit margin for some companies cannot be ignored [8].

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Soochow Securities recommends focusing on four high-certainty directions [9]:

Theme	Sub-Segments	Logic
Military Trade Perspective	Main battle equipment industrial chain	Volumetric growth of systematic orders and customer stickiness barriers
New-Quality Combat Capabilities	Underwater offense and defense, unmanned swarms, intelligent command and control	From technology verification to large-scale deployment
Civil-Military Integration	Commercial space, low-altitude economy, nuclear fusion	Growth flexibility from “military technology for civilian use, two-way empowerment”
Reform Theme	Asset securitization, mergers and acquisitions	Dividends from the injection of unlisted assets by central SOE defense groups

Sector Type	Representative ETF Characteristics	Allocation Strategy
Satellite-Themed ETFs	Clear commercialization, visible orders	Main force of the rally, can add positions on dips [4]
General Space-Themed ETFs	Slightly inferior in elasticity and certainty	Suitable for small-position tracking
Aerospace-Themed ETFs	Long cycle, high proportion of military products	Mainly used as hedging and supplementary allocation
Defense-Themed ETFs	Dual-driven by commercial space and equipment deployment	Balances elasticity and stability, suitable for long-term holding [4]

A three-dimensional model of “Orders + Pipeline + Technology” is used for comprehensive evaluation [6]:

Based on existing orders and revenue → Current cash flow and certainty
Combined with deployment of new product/business/capacity pipelines → Future growth potential and paths
Plus growth premium from key technological breakthroughs → Capability and barriers to fulfill orders and pipelines

:

• National Team (Low Risk Preference)
  : China Satcom, China Satellite Co., Ltd., Aerospace Electronics, etc. [6]
• Private/Mixed-Ownership (High Volatility, High Growth)
  : Enterprises in the industrial chain related to Landspace, etc. [6]

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Soochow Strategy predicts that around June may become a key window for a new round of “Growth → Value” style rotation [10]. In the current stage:

Phase	Allocation Strategy
Current to Q1	Growth style dominates; continue to focus on tech growth directions such as aerospace & defense
After Q2	Gradually shift to balanced allocation in cyclical resources and low-valued sectors
Full-Year Perspective	Use growth stock pricing factors as the decision-making anchor [10]

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1. Technological Risk
   : There is uncertainty in the R&D of private rockets and satellites; the success or failure of a single launch mission often leads to sharp stock price fluctuations
2. Valuation Risk
   : The current sector valuation is elevated, requiring high performance growth to digest it
3. Capital Volatility Risk
   : Changes in the behavior of leveraged capital and mainstream capital may trigger short-term fluctuations
4. Policy Risk
   : Changes in international relations may affect military trade orders and overseas market expansion of commercial space

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The leading rally in the aerospace & defense sector is the result of the resonance of multiple factors: “all-round technological catch-up + systematic policy support + intensive order delivery + continuous capital inflows”. In terms of sustainability, the structural market for commercial space is expected to continue in 2026, but short-term volatility risks need to be noted.

:

• Short-term sector rotation has certain sustainability; it is recommended to lay out core targets on dips
• Prioritize satellite-themed ETFs and leading enterprises supported by substantial orders
• Pay attention to the style rotation window around June 2026 and adjust the allocation structure in a timely manner

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[1] CITIC Construction Investment’s Ren Hongdao: Commercial Space Enters a Golden Development Period, Focus on Three Major Investment Opportunities (https://finance.eastmoney.com/a/202601083611884330.html)
[2] GEM and BlueFocus: Signals of Moving Against the Trend (https://www.gelonghui.com/news/5145736)
[3] A-share Forward-Looking Individual Stock Analysis, January 1, 2026 (https://unifuncs.com/s/udk1M13c)
[4] Red-Hot! These Themed ETFs Rose Over 30% in a Month (https://www.ifnews.com/news.html?aid=794138&cid=49)
[5] A-Shares: A Once-in-a-Decade Large-Cycle Market (https://wap.stockstar.com/detail/IG2026010600041444)
[6] Commercial Space 2026: The Singularity Moment From Grand National Narratives to Commercial Closure (https://caifuhao.eastmoney.com/news/20260104194251654613660)
[7] Mainstream Capital Monitoring: Aerospace & Defense Sector Sees Net Outflows Exceeding RMB 9.6 Billion (https://www.cls.cn/detail/2250162)
[8] Sanhua Intelligent Controls Surges 5.35%! Aerospace & Defense Sector Breaks Out (https://caifuhao.eastmoney.com/news/20260105025930016426610)
[9] Defense Sector Rises Strongly, Hangtian Huanyu Hits 20% Daily Limit (https://www.stcn.com/article/detail/3507969.html)
[10] Soochow Strategy 2026 A-Share Investment Strategy Outlook: The Giant Wheel of Style Continues to Roll (https://finance.sina.com.cn/stock/marketresearch/2025-11-16/doc-infxqqte7620406.shtml)