PLAYBAR is only optical, which means a maximum signal of Dolby Digital can be sent to it. You may want to check the output of your Blu-ray device to see what it’s sending to that HDMI switch. It needs to be restricted to Dolby Digital (or you need to select that in the soundtrack settings of the disc, but easier to set the device itself.

I’m not clear as to what those settings are for, is that the Sony? If so, I’d definitely set the Dolby Digital Compatible output to “On”, and Downmix to “Surrounds”. Not sure off the top of my head of the others, but it’s worth doing some testing. 

What HDMI switch are you using? What specific Blu-rays and DVDs are you testing?

Try these settings on the Blu-ray player:

Digital Audio Output: Auto

BD Audio MIX Setting: Off

Dolby D Compatible Output: On (if you want DTS audio converted to Dolby), Off if you want to play DTS audio

Audio DRC: Off

Downmix: Surround

I see. I select appropriate audio track on the disc, dolby digital 5.1 or DTS, the sound changes but SONOS app still displays STEREO-PCM. 

Indeed settings on the Sony. 
I have tested that, still the same result. Even changed the settings, changed the disc restarted player, still only stereo output. 

Right. DTS is not Dolby Digital, you’d need to turn off DTS unless you follow @GuitarSuperstar‘s suggestion.

HDMI switch is called “4Kx2K”, most certainly a rebranded kind of switch. As noted, Dolby Digital 5.1 from Apple Tv works perfectly using same switch. 
 

Different blurays/dvds - Steely Dan DVD, Nine Inch Nails DVD, Silicon Valley Season 1 bluray - all shows stereo-pcm output in Sonos app regardless of which audio track I use on the player. 
 

I will try those settings once again and see what happens. 
 

I ordered a new Panasonic bluray with more audio settings available, hopefully this will resolve the issue. But it’s just sad that my current player just won’t work. 

I new Blu-ray player isn’t going to make any difference.

What specific Steely Dan and Nine Inch Nails DVDs are they? Are they DVD-Video or DVD-Audio discs?

You don’t think so? :(

I mean Apple Tv can output 5.1 using same HDMI switch without a problem.

The thing is my current bluray can only switch between AUTO and PCM and coaxial and HDMI output but the new I’m looking at least has force BITSTREAM output with only one HDMI output. 

Steely Dan - https://www.discogs.com/release/6634005-Steely-Dan-Two-Against-Nature

Nine Inch Nails - https://www.discogs.com/release/923989-Nine-Inch-Nails-Live-Beside-You-In-Time

Yeah, I got that. 

Even though Sonos Playbar now supports DTS and there is DTS audio tracks on the discs, I still need to turn it off?

@Feltan Try this:

TEST 1:

Set the Blu-ray player to these exact settings:

Digital Audio Output: Auto

BD Audio MIX Setting: Off

Dolby D Compatible Output: OFF

Audio DRC: Off

Downmix: Surround

On the Steely Dan DVD, make sure you set the audio format in the DVD menu to DTS 5.1.

On the Nine Inch Nails DVD, make sure you set the audio format in the DVD menu to Dolby 5.1 Surround Sound.

Tell me what audio format you get for both.

TEST 2:

Change the Dolby D Compatible Output setting on the Blu-ray player to ON and test both DVDs again.

Also, what specific model TV do you have?

I really appreciate the time and effort, thanks!

Here are the results.

Test 1 - 

Test 2 - 

Also, what specific model TV do you have?

It’s an old Samsung - https://www.samsung.com/se/support/model/LE46C535F1WXXE/- which doesn’t support HDMI pass through, which is the reason I use HDMI Switch with optical port. 

UPDATE

As @GuitarSuperstar suggested - new bluray player didn’t change anything. However, after some deep googling and research I finally understood!

I now got hold of a HDMI Switch & Audio Extractor and surround is now working! Thanks for the help!

Very glad you managed to deal with your issue.. Can you share the model of your HDMI Switch & Audio Extractor? This could save a lot of time with Stereo-only playback frustrations :)