Caterpillar Roars to Record Highs: AI Power Boom and Strong U.S. Demand Drive Blockbuster Quarter Despite Tariff Headwinds

Caterpillar (CAT) just reminded the market why it still gets treated like a proxy for global industrial demand. The company posted a stronger-than-expected third quarter, powered by resilient demand for heavy machinery and surging momentum in energy and transportation. Shares are up roughly 11% and breaking out to new all-time highs, a move that reflects not just the beat but renewed confidence in Caterpillar’s ability to sustain growth into a complicated macro environment that includes tariffs, mixed construction activity, and diverging regional demand.

On the headline numbers, Caterpillar delivered Q3 2025 sales and revenue of $17.6 billion, up 10% year over year and ahead of Street expectations of about $16.8 billion. Adjusted earnings per share came in at $4.95, well above consensus around $4.51–$4.53. Profit per share on a GAAP basis was $4.88, versus $5.06 a year ago. While EPS is down year over year, that decline is largely tax-driven, not operational: the company cited a higher estimated global annual effective tax rate (24.0%) and a discrete tax charge that weighed on reported profit. Operationally, the beat came from volume strength. Sales volume rose by $1.55 billion, mainly because of higher sales to end users, and that higher throughput is what drove top-line outperformance.

Margins did compress, and that’s important context. Operating profit margin was 17.3%, down from 19.5% last year, and adjusted operating margin was 17.5%, down from 20.0%. Operating profit was $3.05 billion, down about $95 million from Q3 last year. Management pointed directly to cost pressure: unfavorable manufacturing costs of $686 million, higher SG&A and R&D of $129 million, and unfavorable price realization of $191 million. One explicit drag was tariffs. Caterpillar said higher manufacturing costs “largely reflected the impact of higher tariffs,” and the CFO noted that tariff headwinds are expected to be larger in Q4. So even as the company is pushing price and volume, input cost and tariff friction are eroding some of that incremental profitability.

This is where the setup becomes interesting for investors. You have a company hitting record highs while simultaneously telling you that tariffs are a growing headwind. In normal conditions, that would be a red flag. Right now, the market appears to be saying: if they can post a double-digit revenue gain, beat EPS by $0.40+, and generate $3.7 billion of operating cash flow in a quarter where tariffs and taxes both bit, then the underlying demand curve is strong enough to absorb some policy and cost noise. Put differently: CAT just printed through the headwind.

Regionally, the demand story is uneven but not weak. Caterpillar said global machines retail sales were up 6% year over year. In North America, sales were up 9%, which lines up with what we’re seeing in U.S. nonresidential and infrastructure work — still healthy, even if residential is softer. Latin America was up 8%, suggesting incremental strength in energy, mining, and infrastructure spend in that region. Asia/Pacific machines sales were down 16%, highlighting that China and broader APAC construction are still under pressure. In other words, North America (and to a lesser extent LatAm) is carrying Asia. That mix matters for the stock: investors are effectively betting that North American demand plus high-spec energy and data center infrastructure will outweigh APAC softness.

By segment, there are three main pillars, and all three contributed to growth:

Construction Industries Sales rose 7% year over year to roughly $6.8 billion. That’s notable, because heading into this print, there was broad skepticism about construction equipment demand, particularly around resi. Caterpillar acknowledged that residential construction has been weak, but also pointed to stabilization and ongoing demand in commercial and infrastructure. This is consistent with the broader U.S. spending pattern: private housing is stalling, but public and industrial build (manufacturing plants, logistics, reshoring, onshoring) is still alive.

Resource Industries Mining-related sales were $3.1 billion, up 2% year over year. This is incremental, not explosive. Investors have been watching for a rollover here, and so far they’re not getting it. While not a huge growth engine this quarter, Resources is holding the line. Given where commodity capex has been structurally undersupplied for years, “not falling apart” is actually bullish for the cycle.

Energy & Transportation This is the star of the show. Revenue climbed 17% year over year to $8.4 billion. Management called out strong demand for engines, turbines, and large-scale backup and generation systems — including power solutions for AI data centers. This is one of the quiet but powerful themes in the Caterpillar story right now: AI is not just about GPUs and racks. Those racks draw power. Somebody has to generate, move, and backstop that power. Caterpillar is selling into that build. That segment strength is why the stock is getting treated like an AI-adjacent industrial instead of just a cyclical earthmover OEM.

From a balance sheet and capital allocation standpoint, the company is running shareholder-friendly and confident. Q3 enterprise operating cash flow was $3.7 billion, and Caterpillar ended the quarter with $7.5 billion in enterprise cash. Management returned $1.1 billion to shareholders through $700 million in dividends and $400 million in buybacks. This matters psychologically: they’re not acting defensive. They’re acting like a company with line of sight into backlog and pricing power.

That brings us to the operating environment and outlook. While Caterpillar does not appear to have issued explicit top-line or EPS guidance for 2026 in this snapshot, the tone from CEO Joe Creed was forward-leaning rather than cautious. He cited “resilient demand,” “focused execution,” and, critically, “a growing backlog,” which “positions us for sustained momentum and long-term profitable growth.” Translation: they don’t see this as a last gasp of the cycle. They see ongoing order strength and backlog conversion into 2026.

It’s worth highlighting that backlog plus incremental volume is overcoming margin compression. Tariffs, higher input costs, and higher compensation (including higher short-term incentive comp) all hit operating profit. Caterpillar effectively said, “Yeah, and we still beat.” The CFO did warn that tariff headwinds will be worse in Q4, so that’s a watch item. But again, the stock is up 5% and breaking out to all-time highs because investors care more about demand durability than near-term margin flicker.

So where are we now? Caterpillar just cleared very high expectations. Shares were already up ~45% year to date heading into the print, and the company still put up a revenue beat, an EPS beat, double-digit sales growth, accelerating Energy & Transportation exposure to AI-related buildouts, and strong North American machinery demand. Margins are off their 2024 peak, and tariffs are biting harder — but the market is telling you that secular demand (infrastructure, AI power, energy systems) now matters more than the old-school construction downcycle fear.