Macro reasons drive Caterpillar's stock price, while potential risks remain

Caterpillar's stock price rose 17.2% in June. The rise in CAT stock can be attributed to its upbeat results in recent quarters. In April, the Q1 earnings results delivered a positive surprise that time, with a 70.49% increase in EPS. Caterpillar said Q2 sales should rise vs. Q1, in line with normal seasonality.

Caterpillar's results can provide insight into the pulse of the global economy. Here's what Caterpillar just told us about the economy and what it could mean for your investment portfolio, even if you aren't interested in Caterpillar stock specifically.

The Biden administration's infrastructure plan has encouraged spending in the construction sector, spurring demand for the machinery maker's excavators, bulldozers and trucks. It kept order books full, and the company was able to raise prices to soften the hit from higher costs.

The Inflation Reduction Act and chips industry policy are still expected to be major supports for nonresidential construction activity in the next few years.

The US housing market seems much more resilient than expected in 2023. Sales of newly constructed homes were up 4.1% in April from March, and up 11.8% from a year ago, according to a joint report from the US Department of Housing and Urban Development and the US Census Bureau. April's month-over-month gain is further evidence that the new construction market is being boosted by exceptionally low inventory of existing homes for sale. Strong residential market drives demand for construction industry machinery.

Its energy customers, grappling with aging machines and tight production capacity, also placed more orders for parts and engines as drilling activities surged with low Strategic Petroleum Reserve.

The Texas-based company's profit from energy and transportation segment rose 96% while sales from this sector saw a 24% increase year-on-year.

The company noted an increase in dealer inventories after Q1 results. An unchanged order backlog compared to the previous quarters may be an indicator of a slowdown in equipment purchases.

Besides, energy prices are highly volatile; falling oil prices make Caterpillar's energy business uncertain.

In the meanwhile, Fed's tightening may have lagged effects. Some economists still expect a recession in the second half of this year. Tightening credit conditions and a stand-off over raising the federal government's borrowing cap have also raised the risks of a downturn.

Sources: CNBC, Reuters, St louis Fed