Rolls-Royce Holdings PLC (LSE:RR.) shares fell 4% to drag down the FTSE 100 after they were downgraded by Citigroup.
A 'buy' rating was removed by the US bank, which moved to a 'neutral' stance.
"Following a strong recovery from the depths of Covid, we believe Rolls-Royce shares are now approaching what we consider to be current fair value," said analyst Charles J Armitage in a note to clients.
However, he hiked the target price for Rolls to 641p from 555p, which left some potential upside, "but insufficient to remain buyers".
Looking at the wider aerospace and defence sector, the analyst said valuations are high across the board, meaning "the question of which stocks to buy has become increasingly idiosyncratic".
As such, he believes the question for investors of whether it is "time to swap out of aftermarket into OE" (ie service providers to the plane-makers themselves) "should be more driven by individual stock dynamics and valuations than intra-sector rotation".
Rolls was one of the names in the sector where he believes the strong growth outlook is now reflected in the share price.
But for others, including Melrose Industries PLC (LSE:MRO, OTC:MLSPF), he thinks the market is "yet to fully appreciate the strength of the mid-term equity story".
A positive view was also given on Airbus, as Armitage believes that higher engine deliveries will help to drive a "strong 2025 exit rate".
In defence, US foreign policy is "critical for sector sentiment" and he expects higher volatility but remains confident that companies will continue benefit from a multi-year European defence build-up of stockpiles.