Caterpillar Squashed

"Weakness in building contracting possibly resulted from lower returns on commercial investments and fewer new home developments," the company said. "Delays in passing the federal budget limited the release of highway funds early in the year. We expect very little growth in nonresidential construction this year, which could cause contractors to be cautious about buying new machines."

Despite the projection for economic weakness, Caterpillar also dropped its previous forecast that the Federal Reserve will lower interest rates in the second half of the year.

"Without interest rate relief, many key industries in the U.S. face continued unfavorable economic conditions," said the company.

Ingalls & Snyder analyst Alex Blanton believes the U.S. weakness shouldn't weigh too heavily on Caterpillar. He says the stock's selloff is a knee-jerk reaction in the market that fails to take into account the company's long-term prospects amid a blistering expansion in global infrastructure demand.

"Caterpillar is a pure-play on global infrastructure, and the problems in the U.S. housing market are not going to derail it over time," says Blanton. "The growth is coming from Brazil, Russia, India and China, and we're not nearing the top of this cycle. It is going to continue."

For the second quarter, Caterpillar reported earnings of $823 million, or $1.24 a share, compared to the $1.05 billion, or $1.52 a share, it recorded for the same quarter last year. Analysts, on average, expected earnings of $1.49 a share.