Caterpillar Inc. (NYSE:CAT) has delivered strong growth this year, and that is reflected in the stock, which has jumped by 37% year-to-date. That means that investors are paying a considerable premium to buy a slice of the company. It trades at almost 25.25x forward earnings, compared with a sector median of 22.14x. The stock is trading at a considerable premium to its own five-year average of 20.28x. Hence, the key question is whether Caterpillar’s earnings can continue growing fast enough to justify that premium.
Caterpillar’s latest results suggest that demand remains strong. Second-quarter sales and revenues increased 24% year over year to $20.5 billion, while adjusted profit per share jumped 73% to $8.17. Moreover, the construction giant’s order backlog also reached approximately $72.1 billion at the end of June, up 15% from the previous quarter.
While construction remains an important part of the business, Caterpillar is increasingly benefiting from diversifying its sources of revenue, including power generation for data centers. This diversification could be a key engine of growth if the construction cycle eventually loses momentum.
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Bull Case
One of the reasons that the market has taken a liking for the stock is that aforementioned diversification. Investors have been looking for names beyond the obvious ones like NVIDIA and into the AI ancillary businesses. Caterpillar manufactures power-generation equipment for data centers, which are crucial for supporting AI workloads.
While the company’s Construction Industries segment remains healthy, with sales to users increasing 22% year-over-year in the second quarter, Power & Energy is becoming increasingly important. The revenue from the segment increased by a solid 33% year-over-year, while power-generation sales rose 72%, driven partly by demand for generator sets and turbines used in data centers.
The company’s exposure to data-center infrastructure could therefore provide a structural source of demand. Caterpillar expects power-generation growth to be driven by the increasing energy demand linked to cloud computing and generative AI data centers.
Its significant backlog also provides visibility into future revenue. The $72.1 billion backlog increased across all three primary segments of the company, with Power & Energy recording the largest increase. The company said that $29.2 billion of that amount is not expected to be filled within the following 12 months, which means that a substantial portion of demand extends beyond the immediate period.
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Bear Case
However, the biggest concern is the stock’s valuation. At 25.25x forward earnings, the stock trades nearly 38% above the sector median and more than 50% above its own five-year average. Hence, a lot of the growth has already been baked in.
Construction has remained solid, but that also means the company is operating against a strong earnings base. If infrastructure spending or equipment demand eventually normalize, Caterpillar could face tougher comparisons and slower earnings growth. Caterpillar expects North American construction equipment sales to grow in 2026, supported by critical infrastructure investment. If those spending trends eventually normalize, the company’s earnings could face pressure against today’s elevated expectations.
Tariffs are another risk. Caterpillar expects approximately $600 million of tariff costs in the third quarter, potentially affecting the amount of revenue growth that cascades to profits.
Conclusion
Caterpillar’s strong backlog, construction demand and, more importantly, its rapidly growing exposure to data-center power infrastructure support continued earnings growth. However, its frothy valuation and exposure to tariffs and a potentially weaker construction cycle raise the bar. The stock’s performance may increasingly depend on whether newer growth drivers can offset any eventual normalization in construction.
Market Sentiment
As of Q2 2026, 84 hedge funds in Insider Monkey’s database owned Caterpillar’s stock, with the total value amounting to $20.9 billion, compared to 87 hedge funds in Q1. While the number of hedge funds reduced in Q2, the total value of the stock held by hedge funds increased from $14.07 billion in Q1.
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This article is originally published at Insider Monkey.
