Caterpillar (NYSE:CAT) saw its shares drop by more than 2% intra-day today after Morgan Stanley downgraded the stock to Underweight from Equal-weight, lowering its price target to $332 from $349. The downgrade centers on concerns over potential inventory destocking in Caterpillar’s Construction Industries (CI) segment amid a U.S. construction equipment market grappling with bloated inventories.

Morgan Stanley analysts suggest that as supply chains normalize and competition intensifies, the oversupply could trigger destocking, adding further pressure on Caterpillar’s earnings. The firm’s 2025 earnings per share estimate for the company now stands 10% below consensus, reflecting a cautious outlook. While Caterpillar’s stock has shown strong year-to-date performance, Morgan Stanley argues that the current 18x earnings multiple reflects overly optimistic growth expectations, framing a negative risk-reward balance for the stock.

Morgan Stanley’s note also highlighted that challenges in the CI segment may outweigh potential earnings boosts from large-scale projects and cost improvements in manufacturing. They anticipate pressures on CI margins as revenue estimates decline, heightening the risk of downward earnings revisions.