I Correctly Predicted That 2024's Best-Performing Dow Jones Stock Would Beat the S&P 500 Again in 2025. Does 2025's Leading Dow Stock Have Room to Run in 2026?

In January 2025, I predicted that Nvidia, which was the best-performing component of the Dow Jones Industrial Average in 2024, would beat the S&P 500 again in 2025. That prediction came true. And although Nvidia was one of the top Dow performers, it wasn't No. 1.

Heavy machinery and earth-moving equipment manufacturer Caterpillar (NYSE: CAT) surged 57.9% in 2025 -- making it the top performer of the 30 Dow components. Caterpillar has added to those gains -- up 14.7% year to date at the time of this writing, and surpassing $300 billion in market capitalization for the first time in company history.

Here's why Caterpillar is on fire, and if the blue chip stock has more room to run in 2026.

Image source: Getty Images.

Caterpillar is very much a part of the AI boom

The tech sector tends to capture the artificial intelligence (AI) spotlight. But rip-roaring gains from industrial stocks like Caterpillar and GE Vernova demonstrate the ripple effects of demand for AI infrastructure.

Data centers are chock-full of high-powered chips and networking systems. But building those data centers requires power and construction.

Caterpillar is at the cross-section of both the construction side of AI data centers and the power side. The company makes industrial gas turbines, generator sets, and battery storage solutions that can help power data centers when grid connections are limited or unavailable.

Caterpillar has also been implementing AI into its products through the Cat AI Assistant and developing more intelligent, autonomous machines. On Jan. 7, Caterpillar announced a partnership with Nvidia to take AI to the physical world through industrial innovation. On Jan. 28, Caterpillar announced a 2 gigawatt order for natural gas generation sets augmented with battery energy storage to handle AI data center loads, with deliveries scheduled from September 2026 to August 2027.

Caterpillar's mining segment is also booming due to increased demand for raw materials -- from those used in industrial processes like copper -- to gold and silver.

Caterpillar's soaring stock price has translated into surging earnings, which are up well over double from pre-pandemic levels.

CAT data by YCharts

Analyst consensus estimates have Caterpillar's 2026 earnings per share rising 20.6% to a record $22.55 from an estimated $18.70 in 2025.

The pressure is on Caterpillar to deliver on lofty expectations

Caterpillar's results have been impeccable, but the stock is far from cheap. With cyclical companies like Caterpillar, valuations tend to look cheap during periods of expansion and more expensive during downturns. But the opposite is true for Caterpillar because its stock has run up much faster than its earnings growth -- as evidenced by its near-seven-year-high price-to-free cash flow ratio and price-to-earnings ratio.

CAT Price to Free Cash Flow data by YCharts

Granted, Caterpillar is growing faster than its historical growth rate. And aside from the catalysts discussed, it also benefits from the onshoring of U.S. manufacturing and oil and gas production. Everything is going right for Caterpillar, but that's already reflected in the stock price.

Caterpillar stock is a hold

Caterpillar is on track to crush the Dow yet again in 2026. But the stock isn't a screaming buy now. Rather, it seems like a good stock to keep on a watch list or hold.

In addition to its impressive fundamentals, Caterpillar has increased its dividend for 31 consecutive years, although the stock yields just 0.9% because the stock price has far outpaced the dividend growth rate.

Investors looking for AI pick-and-shovel plays may want to consider companies with faster growth rates and more attractive valuations than Caterpillar.

Daniel Foelber has positions in Nvidia. The Motley Fool has positions in and recommends Caterpillar, Ge Vernova, and Nvidia. The Motley Fool has a disclosure policy.