As of this writing, Caterpillar's (CAT -1.11%) stock price is down nearly 16% in 2022, and it's been an up-and-down ride. The stock's movements are reflective of the marketplace's ongoing bull-vs.-bear trends this year. Here's a look at what's going on, what investors can expect from Caterpillar this year, and why the stock reflects current investing conditions.

What happened to Caterpillar in 2022?

Caterpillar's roller-coaster 2022 was marked by a double-digit gain in the spring, followed by a sharp reversal since early June. The reason: inflation and recession. 

It's no secret that commodity and raw material costs soared in late 2021 and early 2022 on the back of solid demand from an economy that was recovering from supply constraints related to COVID-19 lockdowns. A robust commodity price environment is a net positive for Caterpillar, which is a major player in the mining machinery market and in oil and gas equipment. In addition, its construction equipment is used in activities related to commodity spending, such as the construction of pipelines and buildings. 

Moving into June, the Federal Reserve's determination to put a lid on inflation through interest rate increases, the European Central Bank entering a rate-tightening cycle , and a slowdown in growth in China spooked the commodity markets into a sharp reversal.

Consequently, the speculative fervor has come out of commodities such as oil, copper, iron ore, and zinc, and the market wasted no time selling off Caterpillar stock. Throw in the possibility of a recession that would slow construction markets, and Caterpillar's outlook gets even gloomier.

Caterpillar in the second quarter 

It all adds up to a highly challenging environment for Caterpillar in 2022. The significant reversal in commodity prices is likely to put sales pressure on Caterpillar's independent dealers, and they will favor thinning out existing inventory before ordering from Caterpillar.

It gets worse. The previous run-up in raw material prices will still be figured in to Caterpillar's costs.

Bottom line: End demand is weakening, and costs, at least for now, remain elevated. Throw in the possibility of a recession that would hit Caterpillar's core construction end market, and the outlook worsens. 

What to expect from Caterpillar in 2022 and beyond

Many industrial companies are likely to report similar conditions in the forthcoming reporting season. Managements can only report on what they see in front of them, so unless they're feeling particularly prescient, it's difficult to expect too much optimism that conditions will change dramatically anytime soon. 

Aside from the second-quarter numbers themselves, the end market commentary, and the update on retail sales, investors should look out for what management says about profit margin for the rest of the year. On the first-quarter earnings call in April, CFO Andrew Bonfield told investors, "We expect margins to improve in the second half of the year compared to both the first half and the comparable period of 2021 as the impact of price actions accelerate." It'll be interesting to see if Caterpillar's margin expectations have changed. 

Caterpillar can muddle through

In short, the near-term picture is not good. However, being too pessimistic about Caterpillar's prospects would be a mistake. While commodity prices are falling now, mining capital expenditures endured a multiyear slump after 2013, and there's a need for the industry to play catch-up. It's a similar story with oil and gas investment. Moreover, many commodities, including copper, aluminum, nickel, and oil are still at levels significantly in excess of where they were before the pandemic. That should support investment. 

Meanwhile, market interest and mortgage rates have decreased since the Federal Reserve last increased rates. That will help allay fears that high rates will choke off construction investment for an extended period. 

10 Year Treasury Rate Chart

Data by YCharts

Furthermore, a slowdown in the economy is probably exactly what it needs to reduce supply chain constraints. As a result, transportation and other supply chain costs could decrease significantly. 

All told, Caterpillar is likely to face a challenging 2022. Still, during its recent investor day, management maintained its expectation of $4 billion to $8 billion in free cash flow (FCF) through the cycle. With the company trading at a market cap of $90 billion, implying trough-to-peak price-to-FCF multiples of 22 times FCF to 11, Caterpillar looks like a decent value for investors willing to tolerate near-term risk.