Why Heavy Equipment Manufacturer Stocks Are Falling Today

Wall Street's initial reaction to the new tariff policies announced Wednesday night is not positive, and manufacturers of heavy equipment are reacting worse than the overall market.

Shares of Caterpillar (NYSE: CAT) and Toro (NYSE: TTC) were each down more than 6% as of 1 p.m. ET, while shares of Deere (NYSE: DE) were down 4%.

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Hits on supply and demand

An aggressive round of tariffs caught the markets off guard, with investors trying to assess the impact to the companies they own while also watching closely for signs trade partners could retaliate.

For companies like Caterpillar, Toro, and Deere, which specialize in construction and agriculture equipment, new levies on raw materials like steel could drive up costs, forcing them to either raise prices or cut profitability.

There is also likely to be an impact on demand, both domestically and abroad. Caterpillar gets a significant portion of sales from China, one of the countries hardest hit by tariffs and one that is seen as likely to retaliate. Domestic business could be impacted as well, as the economic impact of tariffs ripples through the U.S. economy.

Farmers, Deere's core customer group, tend to buy equipment during up cycles when they have extra cash at their disposal. About 20% of U.S. agricultural production is exported outside of the U.S., meaning tariffs could cut into farm profitability.

Higher costs could also eat into demand for construction equipment if projects that were planned six months ago are now deemed cost prohibitive.

Is now the time to buy heavy equipment stocks?

There is also an argument to be made that tariffs can provide a boost to sales. All three of these companies face competition from foreign rivals. And should the tariffs have the desired effect and boost U.S. manufacturing, that will require a lot more factories and mean a lot of demand for heavy-duty equipment to build them.

Truthfully, no one can say for sure how the tariffs will actually impact these businesses, or even know how long the tariffs will last.

For long-term focused investors, there is ample history to suggest these businesses are all best-in-class operators who will eventually adjust to the new environment and thrive. But given the uncertainty about what is to come and how long the adjustment might take, there is every reason to be cautious right now.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Deere & Company. The Motley Fool recommends Toro. The Motley Fool has a disclosure policy.