Time to start fading Caterpillar stock, says trader Tony Zhang
Caterpillar spent the better part of the last year as one of the best stories in industrials, nearly doubling on the back of a data center power boom that turned its backlog into a record. That story is now getting a second look as shares have fallen nearly 30% from their summer high. The stock just broke below the psychologically important $800 level. One of Wall Street’s own analysts has walked back the very AI power narrative that drove the rally in the first place. Industrials as a sector has quietly become one of the market’s clearest underperformers versus the S & P 500 , and this week a trader placed a fresh options bet worth nearly $4 million on more downside in the name. Put it all together, and Caterpillar looks like a name worth fading rather than chasing here. The stock just broke support with poor relative strength, making this a good setup for a defined-risk bearish trade. Timing & outlook Caterpillar broke below $800 this week, closing at $779, down 2.3% on a session where a fresh Middle East oil shock sent the 10-year Treasury yield to a 19-month high and pressured rate-sensitive cyclical stocks across the board. The chart’s next support sits at $772, then $742. A clean break of that zone opens the door to $700, the next real shelf on the chart and our downside target for this trade. Caterpillar carries a weakening relative strength score of just 4 out of 10 versus the S & P 500. Even within its own machinery peer group, Deere is outperforming the S & P 500 while Caterpillar is not. The options market agrees: on September 1, a trader sold to open 500 of the November $740 calls for roughly $4 million in premium, a bet that the rally has already topped out. Fundamentals Caterpillar isn’t a broken business, and that’s actually part of the story. The company is genuinely growing faster and more profitably than the rest of the farm and heavy construction machinery industry it competes in. The problem is that the stock’s valuation already assumes all of that keeps going, at a moment when the growth driver behind it (the AI-era power generation boom) is facing its first regulatory pushback. Caterpillar trades at nearly a 6-point premium to its industry on forward earnings, and that premium must be earned by continued outperformance. When a stock priced for perfection starts missing on momentum instead, that valuation gap becomes the risk. Bearish thesis Wall Street is souring on the AI story. Baird downgraded Caterpillar to Neutral on July 29 and cut its price target to $900 from $1,200, citing New York’s new moratorium on large-scale data centers and growing public opposition to buildouts nationwide. A real dealer inventory drawdown is coming. Caterpillar’s own CFO guided to a fourth-quarter drawdown of more than $1 billion in Construction Industries dealer inventory, after dealers overbought by $400 million in the second quarter. The stock still trades like the good news is guaranteed. Caterpillar’s forward earnings multiple carries a nearly 6-point premium to its industry average, even as the stock underperforms the S & P 500 across every recent timeframe. Options Trade Given the technical breakdown, the industry-wide underperformance, and a fresh regulatory risk now hanging over Caterpillar’s growth driver, we’re looking at a bear put spread to bet on further downside into the $700 support level while keeping the risk limited. The trade: Buy to Open Oct. 16, 2026 770/700 Put Vertical @ $21.97 Debit The Individual Legs: Buy to Open the Oct. 16, 2026 $770 Put Sell to Open the Oct. 16, 2026 $700 Put Max Reward: $4,803 if Caterpillar is below $700 at expiration (our downside target). Max Risk: $2,197 if Caterpillar is above $770 at expiration. Breakeven: $748.03 , the level below which the trade starts showing a profit at expiration. View this trade on OptionsPlay for updated pricing . Summary Caterpillar built one of the best growth stories in industrials on the back of AI-driven power demand, and that story is now the thing under attack. The stock has broken key support, it’s a confirmed underperformer versus the S & P 500, and Wall Street is starting to walk back the very narrative that drove the rally. The risk here looks tilted lower into the fall. The October 770/700 put spread offers a defined way to play that view, risking $2,197 to make up to $4,803, without needing to guess exactly how far or how fast the decline plays out. DISCLOSURES: Zhang has a position in CAT. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
About the Author
