UBS has published a research report downgrading Eaton Corp PLC (ETN.US) from "Buy" to "Neutral". The firm indicated that while the power management company remains well-positioned within the fast-growing artificial intelligence (AI) and data center supply chain, its potential for earnings upgrades over the coming year appears limited. UBS analyst Stephen Fisher stated that Eaton's current share price is at a premium valuation, while pressures on margins from capacity expansion and overly optimistic market consensus for 2026 performance are making the stock increasingly sensitive to potential earnings estimate revisions. Fisher wrote in the report, "We acknowledge Eaton's strong position in the AI supply chain and its solid track record of execution over the years. However, in the near term, the opportunity for upward earnings revisions is very limited—a critical factor for a stock with a high valuation." UBS currently predicts that Eaton's initial 2026 performance guidance will fall below market expectations, as ongoing capacity expansion will constrain margin improvement in its Americas Electrical segment. The firm forecasts a 2026 operating margin of 29.5% for the Americas Electrical segment, a decline of 20 basis points year-over-year, which is below the market's expectation of a modest improvement. Although Eaton continues to benefit from robust data center demand, UBS warned that the profit realized from this business growth will likely be lower than investors anticipate. Backed by a solid data center order backlog and total orders exceeding $18 billion, the firm projects an 11% organic growth rate for the Americas Electrical segment in 2026; however, as new capacity gradually comes online, the incremental margin for this business is estimated to be only 28%. Due to these factors, UBS calculates that Eaton's earnings per share for 2026 and 2027 will be 3% to 4% below the current market consensus. For a stock that has long relied on upward earnings revisions to support its valuation, this dynamic could trigger negative adjustments. UBS also noted that investors are beginning to more clearly differentiate between industrial companies involved in the AI space based on their proportion of service revenue. In this context, Eaton is viewed less favorably compared to peers with higher recurring service revenue—including Vertiv (VRT.US), GE Vernova (GEV.US), as well as commercial HVAC suppliers like Trane Technologies (TT.US) and Johnson Controls (JCI.US). The bank believes that a trend of upward earnings revisions is unlikely to reemerge until at least the second half of 2026, when the current cycle of capacity investment is largely complete and year-over-year cost comparisons become more favorable. However, UBS emphasized that despite the downgrade, Eaton remains a high-quality company with the long-term ability to achieve high-single-digit organic sales growth and double-digit EPS growth. Fisher stated that the rating change is based on valuation rationale, not concerns about the company's long-term growth story. UBS lowered its 12-month price target for Eaton from $440 to $360, which corresponds to a valuation of 24 times the 2027 EPS estimate, broadly in line with the average valuation for the broader industrial sector and representing a reduction from the previously applied premium multiple. Fisher concluded, "Eaton's potential for organic sales and EPS growth remains high, but we believe the downward pressure on earnings estimates warrants a lower valuation multiple."