Deere's Struggle Amid a Rising Market: Sector Rotation and Margin Pressures in Agriculture Equipment

John Deere's (DE) stock has outperformed the S&P 500 and its industry peers year-to-date, rising 12.8% through September 2025 compared to the benchmark index's 9.9% gain, according to a Finviz report. Yet beneath this veneer of resilience lies a company grappling with sector-specific headwinds and macroeconomic pressures that threaten its long-term profitability. The agricultural equipment industry, a classic cyclical sector, is now at a crossroads as shifting demand patterns, trade tensions, and technological disruption collide. For Deere, the world's largest maker of farm machinery, these forces are compounding margin pressures and forcing a reevaluation of its strategic positioning.

Sector Rotation and the Agricultural Equipment Dilemma

The 2025 investment landscape has seen a pronounced rotation toward sectors perceived as less sensitive to economic cycles, such as technology and healthcare. In contrast, cyclical sectors like industrials and agriculture have lagged, despite pockets of innovation. The agricultural equipment industry, in particular, faces a paradox: while precision agriculture tools are gaining traction, demand for large-scale machinery remains subdued. According to a Charles Schwab outlook, investors are adopting a "marketperform" stance toward industrials and technology, citing risks like supply chain bottlenecks and trade policy uncertainty. Meanwhile, the agribusiness sector is witnessing a surge in AI-driven solutions, with over 60% of U.S. farms projected to adopt precision agriculture tools by 2025, per a Farmonaut projection. This technological shift, while promising, has not yet translated into robust demand for new equipment.

Deere's Q2 2025 earnings underscore this disconnect. Despite a $20 billion investment in its Smart Industrial strategy-focused on automation and digital agriculture-the company reported a 16% year-over-year decline in net sales to $12.76 billion, according to its Q2 2025 earnings call. Operating margins in this segment have contracted from 21.7% in FY 2024 to a projected 15.5-17.0% in FY 2025, as Deere's Q2 2025 slides show. Farmers, facing low commodity prices and high borrowing costs, are increasingly opting to rent machinery or purchase used equipment rather than invest in new, high-priced tractors and harvesters, according to a Farm Equipment report. This shift in purchasing behavior is eroding Deere's pricing power, a critical vulnerability for a company that relies on premium margins to fund R&D and innovation.

Macroeconomic Headwinds: Tariffs, Rates, and Commodity Prices

The agricultural equipment sector's struggles are deeply intertwined with broader macroeconomic trends. High interest rates, a legacy of central banks' inflation-fighting measures, have dampened demand across multiple segments. Deere's Q2 2025 earnings call highlighted that U.S. and Canadian farmers are delaying large equipment purchases due to elevated financing costs, a trend that is expected to persist into 2026, according to a Business Record outlook. Concurrently, trade wars and tariffs have added a layer of volatility. Tariffs on steel and aluminum alone are projected to cost Deere over $500 million in FY 2025, a My-Equipment analysis found, with additional pressures from duties on goods from Europe and India. These costs are squeezing margins and forcing Deere to revise its full-year profit guidance downward.

Commodity prices, a key driver of agricultural demand, have also turned against the company. Weak crop prices have reduced farmers' cash flow, further delaying capital expenditures. As noted in a third-quarter earnings report, Deere's Construction and Forestry segment saw operating profits nearly halved due to pricing pressures and weaker demand, according to an S&P Global report. The company's response-scaling back production, implementing cost-saving measures, and offering early order programs for 2026-reflects a defensive posture in a market where growth is elusive.

Strategic Resilience and Long-Term Prospects

Despite these challenges, Deere's long-term fundamentals remain intact. Its dominance in precision agriculture, with nearly 10,000 Precision Ag Solutions orders in the first half of 2025, positions it to benefit from the sector's digital transformation, according to a GlobeNewswire release. The company's $20 billion investment in U.S. manufacturing and technology also signals a commitment to maintaining its competitive edge. However, these initiatives require time to bear fruit, and the near-term outlook remains clouded by macroeconomic fragility.

For investors, the key question is whether Deere's strategic investments will offset current margin pressures. While the company's financial services division has shown resilience-with a 4% revenue increase in Q3 2025-its core equipment operations continue to underperform, according to a CNBC report. Sector rotation trends suggest that cyclical stocks like Deere will remain vulnerable until global trade tensions ease and interest rates stabilize. Until then, the agricultural equipment industry's reliance on volatile commodity cycles and capital-intensive production models will continue to weigh on its growth trajectory.

Conclusion

Deere's recent stock performance, while outpacing the S&P 500, masks a company navigating a perfect storm of margin compression, macroeconomic uncertainty, and shifting consumer behavior. The agricultural equipment sector's transition to digital tools and sustainable practices offers long-term promise, but near-term headwinds-including tariffs, high rates, and weak commodity prices-pose significant risks. For Deere, the path forward hinges on its ability to balance innovation with cost discipline, a challenge that will test its leadership in a sector at a crossroads.```