What Caterpillar's Revenue Revealed

LPL Financial's Chief Investment Officer John Lynch wrote that "consumer spending continues to be the primary driver of output" for the U.S. economy, while "business spending's contribution may drop off."

So what exactly did Caterpillar Inc.'s (CAT - Get Report) revenue of $13.5 billion, which beat estimates, tell us about the business spending climate?

It appears that businesses are buying up Caterpillar's capital goods more than Wall Street had expected, revealing that increased interest rates have not yet had a huge impact on the economy. It has become clear that, at least for the third quarter of 2018, the U.S. economy remains strong.

"The U.S. economy likely grew at a moderate to strong pace in the third quarter," Lynch wrote on Monday, Oct. 22.

But longer-term, in order for Caterpillar shares, specifically, to be a good pick, the U.S. has to be at a non-peak stage of the economic cycle. For industrials and manufacturing, "management teams will need to demonstrate that FY18 was not peak in order to generate outperformance," wrote a team of Morgan Stanley analysts. The good news on the cost outlook for Caterpillar is that "the impact of recently imposed tariffs will be at the low end of the previously provided range of $100 million to $200 million," the company said on its earnings call. 

To me, Caterpillar looks much like the bank earnings we saw last week, in which revenue and earnings were strong, in part because of a solid economy, but if you expect rate increases to have an impact on the economy soon these stocks may not overwhelm in the near future.

Where's All the Money Going? 

Investors seem to be pivoting away from the U.S. and into international stocks. A Goldman Sachs note on Monday showed that $15.8 billion flowed out of domestic exchange-traded funds in the past seven-and-a-half months, while international ETFs saw a net inflow of $2.2 billion. Even though the International Monetary Fund recently said it was lowering its forecast for eurozone economic growth, there still may be better bargains overseas.

"Many people are seeing there's a pretty large valuation disparity between U.S. and overseas markets," Lance Humphrey, senior portfolio manager at USAA, told TheStreet. Humphrey, who said USAA is moving money into international markets for its clients as well, added, "The valuation gap in our view is more than adequate for the difference in {economic} fundamentals." The S&P 500 average price-to-earnings ratio is above 20, while the FTSE 100 in Europe has an average PE ratio of below 20. 

As for those high-flying tech stocks, "One of the largest areas we're avoiding is in the large-cap tech stocks," Humprhey said.