Caterpillar has emerged as a surprise winner this year, outperforming some of the most talked-about artificial intelligence stocks. The outlook for the future is less optimistic. Stocks rose 58% in 2025, with Nvidia and Alphabet up 40% and 47%, respectively. Construction equipment inventories have nearly doubled since their low in April, rising 107%. In fact, Caterpillar’s momentum has accelerated so much this year that its 50-day relative strength against the S&P 500 is now more than three times the average. Relative strength is a metric that investors often use to find stocks that are showing strong upward momentum. Frank Cappellelli, founder of CappThesis, said the move is unusual for Caterpillar, given that the company is often viewed as a “typical non-volatile, non-growth stock.” In addition, ultra-high U.S. tariffs are a major headwind for Caterpillar, as the company is exposed to the global economy. But the company’s relationship with AI, coupled with the prospect of the Federal Reserve’s monetary policy easing, has sent shockwaves through a traditionally robust industry. “The market seems to be giving Caterpillar a pass because it has an AI growth story in its name,” CFRA analyst Jonathan Sacraida told CNBC. “This is basically a very great outlook for Caterpillar given that interest rates have been cut and construction mining sales are starting to recover some.” Industrial to AI Caterpillar has not traditionally been considered much of a growth stock, but that will change in 2025, Sakurada said. For some investors, Caterpillar has become a play on artificial intelligence for several reasons. He noted that the company is benefiting from the construction required to build large, multibillion-dollar data centers. However, Caterpillar also mentioned implementing AI technology to streamline manufacturing and reduce long-term production costs. Most importantly, the Texas-based industrial giant is expanding its operations in power generation. “They are reorienting their business towards the power generation market, which is expected to grow much more than the construction and mining industries,” Sakuraida told CNBC. “All indicators point to us getting into the territory of these more record levels in electricity consumption. So something has to give there, and Caterpillar sees itself as one of the companies providing the solution.” Caterpillar reported a 31% year-over-year increase in power generation revenue in the third quarter. The company cited “data center applications” as the reason for the rapid increase. Overall sales increased 17% year over year. “We’re talking about a company that’s performing very well, even though not every element of the business has tailwinds, and on top of that, the backlog continues to grow,” Brian Sponheimer, portfolio manager at Gabelli Dividend & Income Trust, told CNBC. “So there’s some optimism that what’s to come is promising, so to speak.” Where do we go from here? Despite his bullish view on Caterpillar’s strong business fundamentals, Sagrada only rates the stock with a hold rating. He said the strong year-to-date gains make it difficult to justify large gains going forward, especially when combined with next year’s returns, which are expected to be “a little more modest.” “Can we expect this kind of rally again? No, but at the same time it’s not a sell if these gains are completely unwarranted. They are warranted, but the upside is much less,” Sacraida said. Sponheimer agreed, arguing that the company’s “very high” expectations have made it extremely difficult for Caterpillar to continue delivering results that satisfy investors. Going forward, he thinks the stock is more likely to stay range bound than sell off. “I don’t know if we’re necessarily looking for a correction, but what we often see with cyclical companies is that there can be some price appreciation relative to the underlying market trend. There can be a period of recovery where the stock price plateaus,” he said. Cappellelli believes the strength of Caterpillar’s upward momentum could signal a bigger pullback than traders have seen thus far. “There’s probably a good rubber band stretching right now, so understanding that a pullback as big as we’ve ever seen is inevitable and seeing where it settles before buying is probably a better risk-reward scenario than buying after a three standard deviation move,” he said. “My personal preference is not to buy stocks that are definitely going down, but to see where the support is and buy that support after a pullback,” said Will Tamplin, an analyst at Fairlead Strategies. He added that Caterpillar’s relative outperformance against the S&P 500 “looks like it needs to take a breather here.” CAT YTD Mountain CAT YTD YTD As for how far the stock could fall, Tamplin highlighted two potential levels. One is Caterpillar’s 50-day moving average, which has support in September at about $500 and the subsequent Fibonacci retracement level at about $471. He added that a break below $471 would mean a longer correction and a more significant technical deterioration. “If it goes below 50 days, it would be the first time it’s been below 50 days since the April trough. That would be an important development that would indicate that maybe exposure could be partially reduced,” Tamplin told CNBC. “And a break above the 471 level could signal a potentially more significant correction that is not short-term in nature.” Meanwhile, Tamplin also keeps an eye on upside resistance at the $600 level. He said if the stock can break through that level and sustain it for more than a week, it would support a resumption of the prevailing uptrend. However, the odds are high that the price will return to the 50-day moving average before reaching the $600 level.
