Heavy Machinery Sector Faces Tariff Headwinds as Demand Weakens
Caterpillar and Deere flag over $1.1 billion in tariff costs, while a downturn in residential construction adds to profitability concerns for the industrial giants.
The U.S. heavy machinery sector is bracing for a period of heightened uncertainty as industrial bellwethers Caterpillar (NYSE: CAT) and Deere & Co. (NYSE: DE) confront a dual threat of steep tariff costs and softening demand in key construction markets.
The two companies have collectively signaled a potential bottom-line impact of more than $1.1 billion from trade tariffs, casting a shadow over a sector highly sensitive to global economic cycles and trade policy. The warnings come as new data reveals a cooling in the domestic construction market, adding another layer of concern for investors.
Deere & Co. has felt the most immediate impact, reporting a 9% decline in net sales during its third fiscal quarter. The Moline, Illinois-based manufacturer of the iconic green tractors directly attributed a significant portion of its challenges to trade frictions, incurring approximately $200 million in tariff-related costs in the quarter alone. In an earnings call with analysts, the company revised its full-year pre-tax tariff impact to nearly $600 million, contributing to a 26% slide in net income.
Meanwhile, construction giant Caterpillar has also sounded the alarm on profitability. While the company projects moderate sales growth, it anticipates a significant hit to its operating profit margin from an estimated $500 million to $600 million in tariff costs in the third quarter. This pressure on profitability, even amidst stable sales, highlights the challenge of absorbing rising input costs in a complex global supply chain.
Shares of both companies reflected the cautious sentiment. Caterpillar was trading around $520.50, well off its 52-week high of $543.43. Deere traded near $469.42, also below its recent peak of $530.24, as investors weigh the impact of margin compression on future earnings.
Adding to the sector’s headwinds is a marked slowdown in U.S. construction activity. Total spending in the sector fell 2.85% year-over-year in the third quarter, according to recent industry analysis. The downturn is being driven primarily by a sharp contraction in the residential market, which slumped 6.7% as higher interest rates dampen new home construction.
While the residential segment struggles, nonresidential construction—particularly large-scale industrial and infrastructure projects like data centers—has remained a pocket of resilience. This divergence creates a mixed demand environment for equipment manufacturers. While sales for heavy earth-moving machinery used in major infrastructure projects may hold steady, demand for smaller equipment tied to residential building is at risk.
Analysts remain cautiously optimistic but have tempered expectations. The consensus price target for Caterpillar sits at $498.48, below its current trading price, with a majority of analysts holding a "buy" or "hold" rating. Deere holds a slightly more bullish consensus target of $524.95, suggesting analysts believe the company can navigate the current challenges.
Looking ahead, investors will be closely monitoring upcoming earnings reports for any revisions to sales forecasts and further commentary on margin erosion. The sector's performance will hinge on its ability to manage persistent tariff costs while navigating a domestic construction market that is clearly losing momentum.