Caterpillar Q2 Earnings Preview: Can AI Power Demand Outweigh Tariff Headwinds?

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Caterpillar Inc. is set to release its Q2 2025 earnings before the market opens on Tuesday, and the report comes against a backdrop of tariff uncertainty, cooling global growth, and a market that continues to favor companies tied to AI-driven infrastructure expansion. Investors will be watching closely to see whether the machinery giant can offset tariff-related headwinds with resilient demand in its Energy & Transportation segment, particularly as data center growth continues to fuel large engine sales. The company’s $35 billion backlog provides some cushion, but the spotlight remains on how Caterpillar plans to sustain margins and navigate mounting macro risks.

The Street expects Caterpillar to post Q2 earnings per share of $4.90, down 18% year over year, on revenue of $16.26 billion, a 2.6% decline from last year’s comparable quarter. J.P. Morgan is slightly below consensus, modeling $4.86 EPS and $16.4 billion in sales, while noting margins should hold near 18.2%. These expectations mark a step down from Q1, when Caterpillar reported a 10% year-over-year decline in sales to $14.2 billion but managed to hold adjusted operating margins at 18.3% through favorable cost management. That quarter also saw the company generate $200 million in ME&T free cash flow despite tariff and pricing pressures, highlighting its operational resilience.

Key metrics to watch will include segment-level performance, backlog growth, and margin trends. The Energy &Transportation unit is expected to be the primary growth driver again, with analysts citing surging demand tied to AI data centers and solar turbine orders. In Q1, the segment delivered a 13% year-over-year sales increase, including a 58% jump in power generation. By contrast, Construction Industries and Resource Industries both posted double-digit declines last quarter — down 19% and 10%, respectively — due to weaker dealer inventory growth and pricing headwinds. Investors will be looking for signs of stabilization in these segments as construction trends remain a central swing factor for Caterpillar’s 2026 outlook.

Management guidance heading into Q2 suggests sales will be flat to slightly down versus last year, with adjusted operating profit margins holding in the top half of the target range in a pre-tariff scenario. However, tariffs are expected to be a material drag, costing $250 million to $350 million in Q2 alone. COO and incoming CEO Joe Creed has acknowledged that while short-term mitigation efforts are in place, long-term strategies depend on tariff clarity. Analysts remain concerned that persistent tariff costs could weigh on both profitability and demand, especially in rate-sensitive sectors like Construction Industries.

Caterpillar’s cash deployment and capital allocation will also draw scrutiny. In Q1, the company returned $4.3 billion to shareholders via dividends and buybacks but noted that FY2025 CapEx is expected to run about $2.5 billion. Free cash flow generation will be a critical focus given the anticipated tariff drag. At the same time, investors are watching for updates on how Caterpillar plans to leverage its cash for capacity expansions, particularly in large engines tied to the AI power boom. Melius Research has flagged data center-driven demand as a structural positive, noting that the commoditization of AI chips makes physical infrastructure like Caterpillar’s engines increasingly critical.

Looking back at Q1 provides context for Q2. Despite the 10% decline in sales, Caterpillar managed to grow its backlog by $5 billion, underscoring continued strength in order activity even as dealer inventories came under pressure. Adjusted profit per share was $4.25, supported by disciplined execution, while adjusted operating profit reached $2.6 billion. This was a notable feat in a quarter where Asia/Pacific machine retail sales fell 7%, and global sales were down 1%. The company has now maintained margins above 18% for consecutive quarters, reinforcing its ability to navigate a challenging environment.

For Q2, the bull/bear debate centers on whether Construction Industries can stabilize and whether tariff costs can be sufficiently offset. UBS notes that construction remains the swing factor for Caterpillar’s 2026 EPS outlook, with bulls projecting $22–23 of EPS in 2026 versus bears at $17–18. Citi sees Caterpillar as a standout beneficiary of the "Big Beautiful Bill" with provisions like 100% bonus depreciation and domestic R&D expensing supportive of long-term demand. Meanwhile, Melius has turned bullish again, citing Caterpillar’s role in the AI-driven power generation buildout and raising its price target to $500.

The sentiment heading into the print is cautiously optimistic. Truist recently argued that Caterpillar’s margins can prove more resilient than the market expects, while OpCo pointed to backlog growth and the stabilizing influence of services, which now make up 40% of sales, as structural supports. However, valuation and tariff concerns remain front and center. Over the last three months, EPS estimates have seen more downward than upward revisions, underscoring the Street’s skepticism.

Bottom line: Caterpillar’s Q2 earnings will test whether backlog strength and Energy & Transportation growth can outweigh tariff headwinds and ongoing construction softness. Investors should watch EPS delivery relative to the $4.90 consensus, backlog trajectory, and commentary around tariff mitigation and AI-related power demand. With shares up 19% year-to-date, outperforming the S&P 500’s 6% gain, the bar is high for Caterpillar to deliver a print strong enough to keep bullish momentum alive.

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