JPMorgan Trims Optimism on AI Industrials as Cycle Matures

Key Moments

JPMorgan Turns More Cautious on AI-Linked Industrial Stocks

JPMorgan has adopted a more guarded view on industrial companies tied to artificial intelligence data center investment, signaling a shift in sentiment toward this high-profile segment. The bank initiated coverage of Eaton (NYSE:ETN), Johnson Controls (NYSE:JCI) and Vertiv (NYSE:VRT) with Neutral ratings, and reduced price targets across much of its existing AI-related industrial coverage.

Analyst Julian Mitchell told clients that the capital spending cycle for AI infrastructure has progressed significantly, moving away from its initial phase.

He said the cycle is now entering its later years and argued that the current interest rate backdrop is likely to accelerate that transition by pushing required returns on data center projects higher.

“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.

Positioning After the Pullback and Market Comparisons

Despite the increasing caution, JPMorgan is not taking an outright negative stance on any of the names under its coverage universe in this group. The bank does not hold an Underweight rating on any of these stocks and anticipates that the segment could see a strong rebound following the recent sell-off.

Mitchell highlighted that more defensive industrial names have held up far better than some of the higher-beta AI beneficiaries. As one example, he pointed out that Otis has outperformed Vertiv by roughly 50% over the last five to six weeks.

The analyst likened the current environment to the pattern observed in telecom equipment shares after the collapse of the dot-com bubble, when the space experienced repeated trading rallies despite a more challenging fundamental backdrop.

Barbell Strategy: Preferred Names and Themes

In response to the evolving AI cycle, JPMorgan is advocating a barbell portfolio construction within industrials. On one side, the bank prefers companies with more predictable earnings streams supported by large service operations or substantial order backlogs. Within this group, JPMorgan cited GE Vernova and Trane Technologies as favored names.

On the other side of the barbell, the bank is looking to smaller-capitalization names that have fallen sharply but still offer robust earnings growth potential or are in the midst of internal improvement efforts. Among these, JPMorgan highlighted FPS, nVent, Regal Rexnord and SPX Technologies as appealing opportunities.

Earnings Outlook and Target Price Reductions

JPMorgan left its earnings projections intact across the AI-sensitive industrial coverage. The bank indicated that its models already incorporate a deceleration in AI-related revenue beginning in 2028, which helped to limit the need for revisions at this stage.

However, it did trim price targets for several stocks that remain rated Buy, reflecting a more conservative valuation stance while keeping the fundamental outlook unchanged. The updated targets are summarized below:

All of these companies remain Buy-rated despite the target reductions, underscoring JPMorgan’s view that, while the AI spending cycle is maturing, select industrial names still offer attractive upside within a more nuanced, barbell-style allocation.