Caterpillar Inc.’s stock experienced a significant decline as investors raised concerns about the durability of its recent gains tied to artificial intelligence, leading to its steepest five-day drop since April. The shares fell 9.6% over the five sessions ending Thursday, marking the weakest performance within the S&P 500 Machinery Index. However, the stock showed signs of recovery on Friday morning, climbing as much as 2.8%.
“With anything related to AI suddenly underperforming, CAT is doing the same,” commented Matt Maley, chief market strategist at Miller Tabak + Co. “The AI phenomenon has helped multiple expansion for many AI-related stocks. Now it is causing some multiple contraction.”
Caterpillar, renowned for its yellow backhoes and bulldozers, has emerged as an unexpected player in the AI space, primarily due to its smaller business segment that sells gas turbines for data centers. This development has contributed to a roughly 60% increase in the stock’s value this year, aided by falling interest rates that typically spur construction activity. The shares reached valuations as high as 28 times forward earnings, marking their highest multiple since 2017.
However, the broader market for AI-linked stocks has faced headwinds lately, particularly following a disappointing outlook from Broadcom Inc. This has prompted a rotation into other sectors, with additional power equipment manufacturers like GE Vernova Inc. and Vertiv Holdings Co. also experiencing declines. The S&P 1500 Construction and Engineering group fell 7.8% over the same five-day period.
Despite these recent challenges, Caterpillar retains gains from a strong earnings report issued in October. Bob Lang, founder of options-market commentary outfit Explosive Options, noted that a broad uptrend for the stock remains intact. He stated, “The fact that Caterpillar’s on the cutting edge of this right now is only going to benefit them in the long run.”
While the AI narrative has significantly influenced Caterpillar’s performance this year, RBC analyst Sabahat Khan emphasized that the company’s fundamental business continues to excel. “The real risk is the earnings expectations investors may have over the next four to five years,” Khan stated, adding that there are questions regarding whether actual demand and the AI theme will persist as tailwinds in the coming years.
The unexpected foray into AI has positioned Caterpillar uniquely within the machinery sector, as it capitalizes on emerging trends while maintaining its core operations. However, as the market grapples with shifting sentiments around AI investments, the company’s future performance may hinge on its ability to balance innovation with solid business fundamentals.
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