What happened

Shares of heavy machinery makers Caterpillar (CAT 1.59%) and Deere & Company (DE -0.18%) were up 3.2% and 3.0%, respectively, as of 3:44 p.m. ET Tuesday versus the S&P 500's (^GSPC 1.02%) more modest gain of only 0.65%. While no company-specific news surfaced for either name, the economic backdrop increasingly favors both stocks.

So what

It's complicated, sort of.

While farming equipment outfit Deere and mining/construction equipment company Caterpillar are both sensitive to economic strength or weakness, both are also subject to other factors. Chief among these factors is the price of the materials needed to build their wares -- steel, namely. High steel prices can undermine results that would otherwise be robust due to economic strength. Conversely, low steel prices can salvage weak results stemming from a tepid economy.

As it stands right now, though, Caterpillar and Deere might be poised to enjoy the combination of a healthy economy and subdued metal prices.

Regarding the former, Tuesday's consumer inflation report suggests that tempered economic strength is in the cards rather than the feared, deeply damaging recession. The Bureau of Labor Statistics reports that the annualized inflation rate for U.S. consumers fell to a two-year low of 4% last month. Although still above norms and still relatively high when excluding fuel and food prices, the number is slowly inching its way back to tolerable levels.

At the same time, iron ore prices -- a key barometer of Deere's and Caterpillar's materials costs -- have renewed a downtrend that first took shape in mid-March.

And this weakness could persist. Goldman Sachs recently warned that China's once-robust demand for the building material could wane as its construction ambitions run into the headwind of fiscal reality. Indeed, Fitch Solutions fears that a slowdown in China's building goals could work against steel prices for up to five years, just as many mines and developmental efforts are coming back online to restore supply following pandemic-prompted shutdowns.

It's not all bad news, though. Just today, the European Steel Association also announced its prediction that steel consumption within the EU will grow by 5.4% in 2024, which is quite a bit by the commodity's historical standards. Although the outlook is specific to the continent, it still points to global demand that includes equipment manufacturers like Deere & Co. and Caterpillar.

Now what

It's tricky to sift the temporary noise from dynamics that will be long-lived. To the extent that it can be done, however, the global underpinnings favor Deere and Caterpillar more than they don't.

See, the steel price cycle can last for years, because it takes years to open or reopen a mine, and closing one -- even temporarily -- for price-related reasons can prove costly. That's why iron ore supplies should remain robust for the foreseeable future, keeping steel costs in check while the global economy resumes its post-pandemic recovery.

It's an ideal scenario for Deere and Caterpillar. But more than that, it's a reason to step into either stock even following their recent rallies.