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Caterpillar Calls Global Growth Into Question

Second-quarter earnings have been fairly strong across the market, but that's largely due to cost-cutting and margin expansion, not revenue growth. As a global supplier to construction and mining industries, Caterpillar (NYSE: CAT  ) sees the foundation of economic expansion and is often considered an economic bellwether, particularly in emerging economies like China. That's why the company's cautionary words have helped drive the Dow Jones Industrial Average (DJINDICES: ^DJI  ) and S&P 500 (SNPINDEX: ^GSPC  ) down 0.26% and 0.39%, respectively, today.  

Caterpillar's revenue fell 16% in the second quarter to $14.62 billion, and its profit dropped 43% to $960 million, or $1.45 per share. Both figures were below estimates, and they show just how much demand for mining companies and other construction companies has dropped this year. A big factor is economic growth, and Caterpillar warned that it foresees global growth of no more than 2% this year, as well as continuing headwinds in Europe, where management thinks the eurozone just finished a seventh consecutive quarter of negative growth. 

Caterpillar benefited greatly from a boom in gold and other commodities, but now that prices have fallen, it's left with declining results. That's to be expected, but global growth has been driven by this capital investment, particularly in China, and the consumer isn't ready to support the economy just yet, because unemployment is still high. So Caterpillar thinks we'll likely see slow growth as all of these factors collide, which doesn't bode well for growth further down the supply chain.

The other company not seeing the growth investors had hoped for is AT&T (NYSE: T  ) , which reported earnings and promptly fell 1.5% today. Revenue was up just 1.6% to $32.1 billion, and EPS rose 7.6% to $0.71, but both fell short of estimates. Even for a company as dominant as AT&T is in mobile, revenue growth is slow, and cost-cutting must play a large role in expanding earnings. This will be a common theme until economic growth picks up. 

The behemoths of the Dow will likely continue to see slow growth, but Motley Fool co-founder David Gardner, founder of the No. 1 growth stock newsletter in the world, has developed a unique strategy for uncovering wealth-changing stock picks -- and he wants to share it, along with a few of his favorite growth stock superstars, with you. It's a special free report called "6 Picks for Ultimate Growth." So stop settling for index-hugging gains and click here for instant access to a whole new game plan to help power your portfolio.

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9/30/2016 5:01 PM
^DJI $18308.15 Up +164.70 +0.91%
^GSPC $2168.27 Up +17.14 +0.80%
S&P 500 INDEX CAPS Rating: No stars
CAT $88.77 Up +1.30 +1.49%
Caterpillar CAPS Rating: ***
T $40.61 Down -0.12 -0.29%
AT and T CAPS Rating: ****