Investing.com — JPMorgan said it has become far more cautious on industrial stocks tied to AI data center spending, with the bank starting Eaton (NYSE:ETN), Johnson Controls (NYSE:JCI) and Vertiv (NYSE:VRT) at Neutral and lowering the price targets on most of its other AI-linked names.
Analyst Julian Mitchell told investors that the AI capital spending upcycle has moved past its early stage and into its later years.
He added that higher interest rates are likely to speed up that maturation by raising the return hurdles for data center investment.
“What we have learned in recent weeks / over Q3 earnings season makes us far more wary on the AI-linked names than we were when we assumed coverage in September,” Mitchell wrote.
Still, JPMorgan does not rate any of these stocks Underweight. The bank expects a sharp bounce after the recent sell-off, noting that defensive Otis has outperformed Vertiv by about 50% over the past five to six weeks.
Mitchell compared the setup to the repeated rallies in telecom equipment stocks after the dot-com bubble burst.
JPMorgan recommends a barbell approach. It favors companies with strong earnings visibility from large service businesses or backlogs, such as GE Vernova and Trane Technologies.
It also likes beaten-down smaller companies with high expected earnings growth or self-help stories, including FPS, nVent, Regal Rexnord and SPX Technologies.
The bank did not change its earnings estimates, as it already assumes a slowdown in AI-related sales from 2028.
It cut its target for Trane Technologies to $480 from $550, Forgent Power Solutions to $35 from $49, GE Vernova to $1,000 from $1,035 and nVent Electric to $155 from $167. All of those names are Buy-rated.
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