Baird downgrades Caterpillar to Neutral on rising data center regulatory risks

Investing.com -- Baird downgraded Caterpillar to Neutral from Outperform and cut its price target to $900 from $1,200, arguing that mounting U.S. state and local regulations targeting data center development could slow equipment demand from 2027 onward, even as the company's near-term order book remains strong.

The brokerage said the investment case is shifting as governments increasingly impose restrictions on new data center construction, citing New York's moratorium as the most prominent example of a broader trend. According to Baird, tighter regulations, permitting hurdles, reduced site availability and higher development costs could temper hyperscaler capital spending growth and weaken future demand for Caterpillar's power generation equipment.

Baird said Caterpillar's near-term fundamentals remain robust, with strong orders, backlog and earnings momentum expected through the second half of 2026 and a high likelihood of upside versus consensus estimates. However, it warned that investors are likely to shift their focus toward a potential slowdown in orders during 2027 and 2028 as equipment supply expands while data center investment growth moderates.

The brokerage noted that more than 40 U.S. states considered over 260 data center-related bills in 2025, with more than 300 additional proposals filed across 30 states during the first quarter of 2026. It said policy has increasingly shifted from attracting data center investment through incentives to imposing restrictions, taxes and additional regulatory oversight.

Baird argued that slowing hyperscaler capital expenditure growth beyond 2026, combined with significant industry capacity expansion in large engines and turbines, could shift the power generation equipment market from undersupply toward excess capacity later in the decade. While it does not expect an "AI bust," the firm believes a more constrained regulatory environment could compress valuation multiples as cyclical dynamics normalize.

The brokerage also removed Caterpillar from its bullish "Fresh Pick" list while maintaining that dealer inventory normalization, operational improvements and exposure to infrastructure and energy markets should continue to support the company's performance over the near term.

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