Caterpillar (CAT) stock has been on quite a run in the past three months due to strong underlying demand. However, trouble is brewing after the construction equipment manufacturer reported its second-quarter 2025 earnings. The headline-grabbing element of the report was management’s warning that new tariffs could result in a $1.3 billion to $1.5 billion headwind to profitability for the full year 2025.
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Moreover, the company fell short of EPS, revenue, and operating profit expectations. Caterpillar has been dealing with profitability issues for quite some time, so the ongoing tariff regime could not have come at a worse time.
Despite these headwinds, Caterpillar’s booming Energy & Transportation (E&T) segment, which has an interesting connection to artificial intelligence (AI), and its place on the S&P 500 Dividend Aristocrats Index make me Bullish on the stock in the medium-long term.
CAT’s Cyclical Nature Spells Opportunity
To understand Caterpillar’s current state, context is key. The company is a quintessential cyclical investment, meaning that its business and stock are highly influenced by macroeconomic factors (e.g., construction and mining activity decline significantly during a recession).
With that said, Caterpillar has been actively working to diversify its business, seeking less-cyclical revenue streams. While construction remains its core business, Caterpillar’s E&T segment is quickly gaining steam.
AI’s Surprising Role in Powering Caterpillar
It may be a surprise, but even Caterpillar has a connection to AI. Its E&T segment growth is directly linked to the booming demand for reciprocating engines and power generation solutions for data centers. Hyperscalers like Meta (META) and Alphabet (GOOGL) are investing tens of billions of dollars into AI infrastructure. Caterpillar’s reciprocating engines help power these data centers.
In Q2, its E&T segment generated $7.8 billion in sales (up 7% year-over-year) and $1.6 billion in profit (up 4%). Critically, this segment is offsetting some weakness in Caterpillar’s Construction Industries and Resource Industries (serving mining and quarry sectors) segments.
Segmental Pressures and Industry-Wide Headwinds
CAT’s Construction and Resource Industries segments, in particular, saw substantial ~30% decreases in profit. Unfavorable manufacturing costs are being cited as key factors, and these issues are not unique to Caterpillar in the industrial machinery sector.
John Deere’s Construction & Forestry segment fared even worse, experiencing a 43% drop in operating profit in Q2 2025. Elsewhere, CAt’s financial products segment maintains steady growth, with increased retail credit applications. Although tariff and economic uncertainties pose risks, CAT’s management has assured the market that its operational focus and backlog strength will be enough regardless of market conditions.
Navigating Tariffs with a Record Backlog
Rubbing salt in the wound, Caterpillar revealed that tariffs will result in between $1.3 billion and $1.5 billion in costs this year, further impacting its bottom line. The company is implementing several strategies to combat this risk. Meanwhile, Caterpillar’s backlog reached an all-time high of $37.5 billion, representing 10% year-over-year growth in orders. Amid macroeconomic uncertainty, this gives Caterpillar some visibility into future revenue.
Moreover, Caterpillar’s balance sheet provides a solid buffer to short-term disruptions, featuring $5.44 billion in cash and zero debt.
Assessing Valuation and Shareholder Returns
As noted earlier, Caterpillar’s (CAT) valuation has edged higher, with its P/E ratio now at 22.1—about a 6% premium to the Industrials sector median of 20.85. This comes despite trailing 12-month revenue growth of -4.87%, well below the sector median of 3.29%.
The premium suggests the market is betting on a near-term rebound in growth. Even if CAT underperforms amid the anticipated profit compression in the year’s second half, shareholders can still count on a robust quarterly dividend of $1.51 per share.
Is CAT Stock a Good Buy Now?
On Wall Street, CAT sports a consensus Moderate Buy rating based on eight Buy, five Hold, and one Sell ratings in the past three months. CAT’s average stock price target of $447.36 implies an upside potential of 7.25% over the next twelve months.
Last month, analyst Kristen Owen of Oppenheimer assigned CAT a Buy rating and raised her price target from $395 to $483. She expressed optimism, noting that “Temporary reprieves on tariffs likely support Q2 margin upside for the majority of stocks under coverage, along with demand pull-forward for select names. Prospectively, while trade negotiations remain fluid, the firm sees signs of the industrial cycle bottoming.”
CAT Bulls Stay in Charge Despite Short-Term Pain
Caterpillar’s Q2 results were a mixed bag, with strong underlying demand offset by significant, externally driven margin pressures. The outlook for the second half of 2025 remains challenging as profitability is expected to tighten further. Like many peers, Caterpillar is taking a wait-and-see approach on tariffs, though it retains some flexibility in sourcing and backlog repricing if tariffs persist.
When looking at CAT’s price history since 2022, the stock appears to be on a fairly steady uptrend. However, if looking at the past five days, it would seem the sky is falling. Given the fundamentals of the stock, buying the dip is a compelling idea.
If trade conditions ease, the company’s record $37.5 billion backlog—bolstered by growth in the E&T segment—positions it well for continued activity and potential tailwinds in 2026. Overall, Caterpillar appears more resilient than many competitors, and I share Oppenheimer’s bullish view despite near-term headwinds.