Trader Talk: Caterpillar fires a warning shot to the bulls

Caterpillar: 2017 EPS estimate is 'too optimistic' due to headwinds

Caterpillar appears to be telling market bulls: Not so fast.

The equipment maker has just fired a shot across the bow of all the traders who have rushed to buy up stocks based on the vague notion that 2017 earnings will be significantly higher for the following reasons that have largely to do with the incoming Trump administration:

1) There will be tax cuts;

2) There will be fewer regulations, and;

3) There will be a massive stimulus program.

Because of this mental gymnastics, the stock market has become expensive. Shares are now trading at close to 17 times 2017 earnings, well above the historic 10-year average of roughly 14.3, according to FactSet (You can read more about this in my note from yesterday here).

Along comes Caterpillar, which was presenting at the Credit Suisse Industrials Conference. They note that while the company is "encouraged by the potential of a U.S. infrastructure bill, tax reform, smart regulation, commodity prices and the recent OPEC announcement," the current 2017 consensus earnings estimate of $3.25 is "too optimistic considering expected headwinds."

What might those headwinds be? They note, for one, that at $38 billion, 2017 sales will likely be about $1 billion lower than the 2016 outlook.

Caterpillar: 2017 EPS estimate is 'too optimistic' due to headwinds

Regardless, the stock moved down only slightly and is still trading in positive territory. This is likely because analysts have not been moving to aggressively hike 2017 estimates yet, and the market believes that they will likely raise numbers sometime next year.

And this is the problem I have had. This levitation of the market based on vague ideas of tax cuts, less regulation, and fiscal stimulus seem overdone. Not even sell-side analysts—a notoriously gullible bunch, not exactly known for their skeptical thinking (trust me on this)—aren't buying into this yet.

Nevertheless, the market has levitated to new highs. The investing public believes that some kind of large revenue gains are coming down the road, and they will justify a greatly expanded bottom line.

Along comes Caterpillar, which has gently reminded them that while they were "encouraged" by all this bold talk, they aren't changing anything, and they still think the analyst estimates are too high!

How much does the investing public want to believe this "Trump rally" story? They are ignoring Caterpillar's warning, even though it's clear any infrastructure gains for Caterpillar—an obvious beneficiary—will be a 2018 year event at best.

By the way, buried in Caterpillar's report is a revealing slide about their work on the development of "Autonomous Capabilities," a fancy word for self-driving heavy equipment. They note that there is a "Tremendous customer pull to improve safety and productivity," and that they can retrofit trucks or provide these capabilities on new units.

Forget about self-driving cars. How about self-driving earth movers! There's an autonomous steam roller coming to a construction site near you.