Higher Interest Rates Weigh on Caterpillar and GE Vernova but Leave Vertiv Unscathed

The recent interest rate hike and hawkish language from Federal Reserve Chair Kevin Warsh led to an immediate sell-off in industrial stocks, including Caterpillar (CAT), GE Vernova (GEV), and Vertiv (VRT). However, now that the initial reaction has passed, it's time to examine the potential long-term impact of further rate increases on these companies.

Caterpillar carries the most risk among the three, as its construction industries, financial products, and resource industries segments are exposed to higher rates. For instance, increased borrowing costs can make large infrastructure projects more expensive, affecting decision-making in mining and aggregates sectors. However, the power & energy segment is less vulnerable due to a structural trend driven by AI infrastructure-building boom, mainly financed from cash reserves of well-funded companies like Alphabet, Amazon, and Microsoft.

GE Vernova has mixed exposure, with its gas turbine and electrification equipment driving revenue growth. Its strong backlog and long-duration remaining performance obligations (RPO) enable it to ride out temporary weakness driven by interest rate concerns. GE Vernova's CEO Scott Strazik stated that the company is on track to hit a $200 billion backlog in 2027.

Vertiv has the least exposure, as its segment for data center infrastructure equipment is unlikely to suffer unless rates rise significantly. The larger hyperscalers, responsible for the bulk of spending, are funding AI investment from their own resources, which are multiyear structural investments designed to generate a huge return on investment.