Caterpillar’s worst 5 days since April show AI hype’s pitfalls

Caterpillar Inc.’s AI-powered rally stumbled as investors questioned the sustainability of the trade across US equities, sending the stock tumbling from a record high in its worst five-day stretch since April.

The stock fell 9.6% over the five sessions ended Thursday, the weakest performance in the S&P 500 Machinery Index. It recovered some of the losses Friday morning, rising as much as 2.8%.

“With anything related to AI suddenly underperforming, CAT is doing the same,” said 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.”

Famous for its yellow backhoes and bulldozers, Caterpillar became an unlikely AI play because of a smaller business selling gas turbines that can be used to power data centers. That’s fueled a roughly 60% advance in the stock this year, along with falling interest rates that tend to boost construction activity. The shares’ valuation has climbed as high as 28 times forward earnings, their richest multiple since 2017.

More recently, AI-linked shares have broadly taken a hit, weighed down by a disappointing outlook from Broadcom Inc. and a rotation into other parts of the market. Other power equipment names joined Caterpillar in the doldrums, with shares of GE Vernova Inc. and Vertiv Holdings Co. also sliding. So did companies that build data-center or power infrastructure, with the S&P 1500 Construction and Engineering group falling 7.8% over the five sessions ending Thursday.

Caterpillar’s stock still holds gains from a strong earnings report in October. A broad uptrend is still intact, said Bob Lang, founder of options-market commentary outfit Explosive Options. As for AI, he said, “the fact that Caterpillar’s on the cutting edge of this right now is only going to benefit them in the long run.”

Though the AI theme has driven the shares this year, Caterpillar’s underlying business has performed well, RBC analyst Sabahat Khan said.

“The real risk is the earnings expectations investors may have” over the next four to five years, Khan added, and “whether actual demand and this AI thematic will still be tailwinds a few years out.”

Famous for its yellow backhoes and bulldozers, Caterpillar became an unlikely AI play because of a smaller business selling gas turbines that can be used to power data centers. That’s fueled a roughly 60% advance in the stock this year, along with falling interest rates that tend to boost construction activity. The shares’ valuation has climbed as high as 28 times forward earnings, their richest multiple since 2017.

More recently, AI-linked shares have broadly taken a hit, weighed down by a disappointing outlook from Broadcom Inc. and a rotation into other parts of the market. Other power equipment names joined Caterpillar in the doldrums, with shares of GE Vernova Inc. and Vertiv Holdings Co. also sliding. So did companies that build data-center or power infrastructure, with the S&P 1500 Construction and Engineering group falling 7.8% over the five sessions ending Thursday.

Caterpillar’s stock still holds gains from a strong earnings report in October. A broad uptrend is still intact, said Bob Lang, founder of options-market commentary outfit Explosive Options. As for AI, he said, “the fact that Caterpillar’s on the cutting edge of this right now is only going to benefit them in the long run.”

Though the AI theme has driven the shares this year, Caterpillar’s underlying business has performed well, RBC analyst Sabahat Khan said.

“The real risk is the earnings expectations investors may have” over the next four to five years, Khan added, and “whether actual demand and this AI thematic will still be tailwinds a few years out.”