Caterpillar (CAT.US), the industrial giant recently dubbed the "new AI darling" in the U.S. stock market, has seen its AI-fueled rally hit a major roadblock. This downturn highlights growing investor skepticism over whether trillion-dollar AI data center investments by tech giants can deliver optimistic returns—and whether the AI investment frenzy can sustain its momentum in equities. Stocks that surged on the AI hype this year are now retreating sharply from record highs, signaling potentially heightened volatility in AI-driven market narratives.
For Caterpillar, a newfound favorite among investors due to its ties to AI computing infrastructure, shares suffered their worst five-day stretch since April. While the stock rebounded nearly 2% on Friday, tracking gains in the Nasdaq 100, it couldn’t erase a 9.6% plunge over the prior five sessions—making it the worst performer in the S&P 500 Machinery Index. Charts reveal that even power equipment stocks like Caterpillar, GE Vernova, and Vertiv have been swept up in the broader AI selloff, with steeper declines.
"Anything AI-related is suddenly underperforming, and Caterpillar is no exception," said Matt Maley, Chief Market Strategist at Miller Tabak + Co. "This year’s AI-driven valuation multiples expansion is now giving way to contraction and wild swings."
**AI Bubble Countdown?** More than three years have passed since OpenAI’s ChatGPT ignited a global AI investment boom. While capital continues flowing to Nvidia, Broadcom, Google, Oracle, Micron, and other AI infrastructure leaders, doubts are mounting over the sustainability of this rally. Some investors believe the "golden era" of AI hype may be over.
Since November, Wall Street’s top institutions have grown increasingly skeptical of the "Magnificent Seven"-led AI investment wave, warning of a bubble rivaling the dot-com era. Crucially, these firms are now betting on what could burst the bubble—inevitably amplifying volatility in AI-themed stocks.
"We’re at an inflection point," said Jim Morrow, CEO of Callodine Capital Management. "The narrative remains compelling, but the focus now shifts to whether returns justify the investments."
Goldman Sachs recently noted that tech giants pouring billions into AI infrastructure face prolonged uncertainty over returns. The bank described the AI story as reaching the "end of the prologue," where indiscriminate bullishness toward AI-linked assets fades, and market scrutiny tightens.
**Why Is Caterpillar an "AI Darling"?** Known for its iconic yellow bulldozers, Caterpillar unexpectedly joined the AI stock craze due to its niche business supplying gas turbines—critical for powering AI data centers. This propelled its shares ~60% year-to-date, alongside lower rates boosting U.S. construction. At its peak, the stock traded at 28x forward earnings, its richest valuation since 2017.
Traditionally a bellwether for global economic health, Caterpillar’s machinery spans industries and geographies. But recently, its energy equipment—generators, turbines, and storage systems—has thrived on AI-driven demand, becoming its standout growth driver in Q3.
**Broad AI Sector Weakness** The recent selloff hit not just chip stocks but also power and engineering firms supporting AI data centers. The S&P 1500 Construction and Engineering group tumbled 7.8% over five days. While Caterpillar retains most of its October earnings-driven gains, peers like GE Vernova (AI power infrastructure) and Vertiv (data center cooling) have slumped.
Bob Lang, founder of Explosive Options, noted that as markets rotate into overlooked value and cyclical stocks, the S&P 500’s uptrend remains intact. For AI plays, he said, "Caterpillar is now at the forefront—a long-term beneficiary, but with big swings ahead."
RBC analyst Sabahat Khan acknowledged AI’s role in Caterpillar’s 2023 rally but emphasized execution risks: "The real question is whether AI-driven earnings expectations over the next 4–5 years materialize—and if AI demand remains a tailwind by then."
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