Adobe, Digital Realty Hit With Downgrades to Start 2026
Jefferies cuts Adobe to hold on AI competition fears while Bank of America downgrades Digital Realty on data center growth constraints.
Wall Street analysts are getting more selective as 2026 begins.
Adobe and Digital Realty Trust both received notable downgrades this week, joining Apple in the early-year bearish column. The common thread: high expectations meeting competitive reality.
Adobe: AI Competition Catches Up
Jefferies downgraded Adobe to hold from buy and slashed the price target 20%—from $500 to $400.
The reasoning centers on AI disruption. Adobe built its creative empire on Photoshop, Illustrator, and Premiere Pro. But a wave of AI-native tools—from Midjourney to Runway to Canva's AI features—is eating into Adobe's competitive position at both the professional and prosumer levels.
"AI monetization will be gradual," Jefferies analysts wrote, noting that Adobe's own AI tools (Firefly and generative features across Creative Cloud) haven't yet translated into accelerating revenue growth.
The valuation math got harder. Adobe trades at roughly 25 times forward earnings—not cheap for a company facing margin pressure from AI competition. The stock fell 5% after the downgrade, extending a pullback that began in late 2025.
The bear case isn't that Adobe disappears. It's that growth slows, pricing power erodes, and the premium multiple compresses. For a stock that's already down 30% from its 2024 highs, that's a meaningful headwind.
Digital Realty: Wrong Kind of Data Center
Bank of America downgraded Digital Realty Trust to neutral from buy and cut the price target from $210 to $170.
At first glance, this seems counterintuitive. Data centers are supposed to be the picks-and-shovels play for AI. Every AI model needs compute, every compute needs a data center.
But BofA's analysts pointed to a specific problem: Digital Realty's growth is constrained by its development pipeline, which doesn't match current AI-driven demand patterns.
AI workloads require specialized facilities—high-density power, liquid cooling, proximity to chip supply chains. Traditional colocation data centers aren't optimized for these requirements. Digital Realty has exposure to the AI build-out, but it's not the pure play that its valuation implied.
The stock fell 3% on the downgrade. It remains up roughly 15% over the past year, outperforming the REIT sector, but the easy gains appear behind it.
Other Notable Moves
Bank of America (BAC): Wolfe Research downgraded to peerperform from outperform, citing net interest income gains already priced in. With the Fed signaling a potential pause in rate cuts, the NII tailwind that boosted bank earnings in 2025 may be fading.
Palantir (PLTR): Technical analysis services downgraded Palantir from hold to sell after the stock fell 2.7% Thursday. The AI-adjacent data analytics company has been volatile, and its 181x forward earnings multiple leaves little room for disappointment.
Broadcom (AVGO): On the positive side, Broadcom earned an upgrade to buy candidate from hold after Thursday's trading. The semiconductor company's AI networking chips have been in high demand, and it remains a more diversified play on AI infrastructure than pure-play chip names.
Caesars Entertainment (CZR): Susquehanna upgraded from neutral to positive on improved earnings outlook. The casino operator has worked through pandemic-era debt and is benefiting from strong Las Vegas visitation.
Air Products (APD): Bank of America upgraded from underperform to neutral, removing one of its longstanding bearish calls on the industrial gas company.
The Pattern
The downgrades share a theme: competitive intensity catching up with premium valuations.
Adobe faces AI competition. Digital Realty faces demand mismatch. Bank of America faces the end of rate-driven tailwinds. In each case, analysts are questioning whether growth trajectories justify current multiples.
That's a healthy recalibration after two years of strong returns. The S&P 500 gained 25% in 2024 and 23% in 2025. Some stocks got ahead of fundamentals.
The Raymond James downgrade of Apple earlier this week made the same argument: strong fundamentals don't automatically justify premium prices when growth is decelerating.
What It Means for Positioning
For traders, the ratings changes highlight pockets of vulnerability in the market.
Software stocks with AI competition risk—Adobe, Salesforce, ServiceNow—face skeptical scrutiny. The AI narrative cuts both ways: it's great for infrastructure providers but potentially disruptive to incumbent software vendors.
REITs tied to data center themes need differentiation. The market is distinguishing between AI-optimized facilities and traditional colocation. Equinix and CoreWeave (once public) may benefit while second-tier players struggle.
Financials remain rate-dependent. If the Fed holds at current levels longer than expected, the NII boost that powered 2025 bank earnings plateaus. Loan growth would need to accelerate to offset.
The broader message: selectivity matters more in 2026. Rising-tide markets lift all boats, but the tide appears to be shifting. Analysts are drawing finer distinctions, and so should traders.