While artificial intelligence (AI) continues to dominate market headlines in 2025, many of the stocks most closely tied to the technology — the Magnificent 7 stocks of Alphabet (NASDAQ:GOOG | GOOG Price Prediction)(NASDAQ:GOOGL), Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Meta Platforms (NASDAQ:META), Microsoft (NASDAQ:MSFT), Nvidia (NASDAQ:NVDA), and Tesla (NASDAQ:TSLA) — have shown volatility or lagged.
Six of the seven have experienced mixed or negative returns at points throughout the year, with broad concerns over valuations, sector rotations, and sustainability weighing on performance. In contrast, one unexpected name has outperformed six of the seven: Caterpillar (NYSE:CAT), the heavy equipment manufacturer. On a total return basis (capital appreciation plus dividends), Caterpillar trails only Alphabet by about one percentage point or so as of last Friday’s close. Yet less than two weeks ago, Caterpillar was even ahead of Alphabet in year-to-date gains.
So, how is a traditional industrial company easily outpacing some of the world’s largest tech giants?
Caterpillar’s Strong 2025 Performance
Caterpillar has risen approximately 61% in 2025 compared to Alphabet’s roughly 62% gain, leaving the heavy equipment manufacturer just behind the tech behemoth and with the potential to surpass it by year-end.
It also stands as the top performer in the Dow Jones Industrial Average, edging out Goldman Sachs (NYSE:GS) in second place, and significantly outpacing the rest of the Magnificent 7, with only Nvidia, which has returned almost 35% this year, coming close.
What Is Doing the Heavy Lifting for Caterpillar
Caterpillar’s outperformance stems from strong demand in its Energy and Transportation segment, particularly generators and power equipment for AI data centers and infrastructure. Partnerships like the one with Vertiv (NYSE:VRT) for data center power solutions have highlighted Caterpillar’s role in supporting AI growth.
Enduring global infrastructure spending and mining demand have also contributed, but the real standout has been in power generation and oil and gas, segments that saw sales rise 31% and 20%, respectively, in the third quarter.
Tariffs posed challenges earlier in the year, with estimated costs up to $1.8 billion in 2025, but the company mitigated impacts through cost controls and pricing adjustments. Still, inflation continues to weigh on margins, with consolidated operating profits slipping 3%.
However, these drivers that carried Caterpillar higher in 2025 appear sustainable into 2026, with analysts pointing to ongoing AI-related power needs and potential infrastructure rebounds. The risks of tariff escalation and cyclical slowdowns in construction or mining remain present.
Key Takeaway
Cyclical stocks like Caterpillar often deliver the best returns when bought during downturns to capture upside as cycles recover. Caterpillar began rising in late 2022, gained strongly in 2023, and delivered about 24% returns in 2024. In 2025, shares faltered on tariff fears in April before doubling from those lows.
At this point in the cycle, Caterpillar remains a solid holding, with tailwinds from AI infrastructure and global demand likely continuing into next year and beyond. Their strength allowed management to raise guidance for the next five years.
Caterpillar is now expecting 5% to 7% compound annual sales growth through 2030, adjusted operating margins of 15% to 19% at $60 billion in sales and 21% to 25% at $100 billion in sales, and $6 billion to $15 billion in free cash flow—a 20% to 50% increase over prior estimates. While valuations are elevated with the stock trading well above its five-year average across most metrics, the structural shift toward power generation supports further gains rather than an imminent peak.
AI’s strong tailwinds will likely carry Caterpillar stock beyond the typical cyclical decline, and though investors should monitor economic indicators and keep an eye on whether AI is truly in a bubble phase or not, taking profits now may be premature given the outlook.
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