Caterpillar has emerged as an unlikely winner this year, outperforming some of the most fawned-over artificial intelligence stocks. The outlook going forward isn't as rosy. The stock has advanced 58% in 2025, while Nvidia and Alphabet are up 40% and 47%, respectively. Since hitting a low in April, the construction equipment stock has nearly doubled, rising 107%. In fact, momentum in Caterpillar has accelerated so much this year that the stock's 50-day relative strength versus the S & P 500 is now three times above its average. Relative strength is a metric often used by investors to find stocks exhibiting strong upward momentum. Such moves are unusual for Caterpillar, given it is often viewed as a "quintessential non-volatile, non-growth-related stock," said CappThesis founder Frank Cappelleri. On top of that, the company's exposure to the global economy make ultra-high U.S. tariffs a major headwind for Caterpillar. However, the company's ties to AI, along with the prospects of easier Federal Reserve monetary policy, combined to jolt the traditionally staid industrial. "It seems like the market is giving Caterpillar a pass because of its AI growth story attached to the name," CFRA analyst Jonathan Sakraida told CNBC. "If you consider that there's rate cuts and we're starting to see some recovery in construction in mining sales, it's really a great outlook fundamentally for Caterpillar." Industrial to AI play While Caterpillar is traditionally not considered much of a growth stock, that's changed in 2025, Sakraida said. For some investors, Caterpillar has become an artificial intelligence play, for several reasons. The company benefits from the construction needed to build out massive billion-dollar data centers, he noted. But Caterpillar has also mentioned incorporating AI technology to help streamline its manufacturing and reduce long-term production costs. Most importantly, the Texas-based industrial giant has expanded its operations in power generation. "They're reorienting their operations to be more in the power generation market, which is expected to grow a lot more than [the] construction or mining industry," Sakraida told CNBC. "All indicators point that we are going to reach these more record-level territories for electricity consumption. So something has to give there, and Caterpillar does find itself as one of the companies providing solutions." Caterpillar reported 31% year-over-year revenue growth in power generation in the third quarter. The company cited " data center applications " for the surge. Overall sales climbed 17% from the year-earlier period. "You're talking about a company where not every component of the business has seen tailwinds, but they've been able to perform very well — and on top of that, see backlogs continue to increase," Brian Sponheimer, portfolio manager of the Gabelli Dividend & Income Trust told CNBC. "So there's been optimism that what is coming down the road, so to speak, is promising as well." Where to from here? Despite the strong fundamentals and a bullish view of Caterpillar's business fundamentals, Sakraida only has a hold rating on the stock. Its massive year-to-date rally makes it hard to justify much upside ahead, especially combined with next year's returns that are expected to come in "a bit more modest," he said. "Can we expect this kind of upside again? No, but at the same time, you wouldn't say it's a sell where these gains are completely unjustifiable. They are justified, but there's just a lot less upside," Sakraida said. Sponheimer agreed, arguing that "sky-high" expectations for the company set a very difficult bar for Caterpillar to continue delivering results that could satisfy investors. Going forward, he believes that it is more likely shares could remain range-bound rather than sell off. "I don't know necessarily that I would call for a correction, but what we do see a lot with cyclical companies where there is potentially some price outgrowth relative to what the underlying markets are doing — there may be a digestion period where we see a plateau for the stock," he commented. Cappelleri believes that the strength in Caterpillar's upward momentum might be signaling a greater pullback than what traders have seen thus far. "Maybe the rubber band right is stretched right now, which is why understanding that inevitable pullback greater than we've seen before is going to come at some point — and seeing where that settles and then buying is probably a better risk-reward scenario than buying after that three standard deviation move," he said. "My personal preference is not buying into a stock that's moving certainly lower, but seeing where support holds and then buying that hold of support after a pullback." Will Tamplin, an analyst at Fairlead Strategies, noted that when a stock is stretched, as is Caterpillar, it will often begin showing signs of upside exhaustion. He added that Caterpillar's relative outperformance versus the S & P 500 "looks due for a pause here." CAT YTD mountain CAT year to date As for how far the stock could pull back, Tamplin highlighted two potential levels — Caterpillar's 50-day moving average of around $500, where it found support in September, and then a Fibonacci retracement level of around $471. Falling below $471 would imply a prolonged correction and more significant technical deterioration, he added. "If it broke below the 50-day, that would be the first time below the 50-day since that April bottom. That would be a significant development that would tell me, hey, maybe partially reduce exposure," Tamplin told CNBC. "And then if you break the 471 level, that could suggest that it may be due for a more significant correction that's not short term in nature essentially." On the other hand, Tamplin is also watching the $600 level for upward resistance. If the stock gets through that level and holds it for a week or more, that would support a resumption of the prevailing upward trend, he said. But probability favors a pullback to the 50-day moving average before the $600 level is reached.
