Key Points

The potential trade deal could end a lot of uncertainty surrounding these stocks. Investors need to remember there were questions about end markets even prior to the tariff announcements, and the shares could take time to fully recover. 10 stocks we like better than Caterpillar ›

Over the weekend, the United States and China laid out the framework for a trade deal and suspended some of the most onerous tariffs imposed by the two countries.

It isn't a done deal yet, but shares of heavy equipment companies that were facing a two-sided blow from the tariffs are rallying on the news. Shares of Caterpillar (NYSE: CAT) climbed as much as 8% on Monday before falling back to up 5%, while shares of Toro (NYSE: TTC) and Deere & Co. (NYSE: DE) were up as much as 5%. Deere gave some of that gain back late in the day and was up just 1% as of 3:30 p.m. ET.Image source: Caterpillar.

Better days ahead?

Cat, Deere, and Toro are three of the premier global names in the manufacture of heavy duty equipment used in construction, mining, agriculture, and lawn care. They were seen as vulnerable to tariffs in two ways: They both rely on raw materials that are often imported and look to markets like China as a valuable source of sales.

Cat shares traded down as much as 35% for the year immediately following the early April tariff announcements, and Toro and Deere shares also traded down significantly. The companies also must worry about the secondary impact of tariffs. Deere could lose agriculture equipment sales due to tariffs on farm output, for example, and Toro could lose lawn equipment sales if the consumer falters because of higher costs.

Headlines from over the weekend are sparking a relief rally in the stocks. China and the U.S. don't have a finalized deal yet, but they appear to be making progress in resolving their differences. All three of these companies can weather some impact due to tariffs, but investors are eager to avoid a prolonged slowdown.

Is it time to buy heavy equipment stocks?

The market is moving in the right direction, but investors have ample reason to be cautious.

Even before the early April "Liberation Day" tariff announcement, there were concerns about a potential economic slowdown which could eat into demand for the high-priced equipment these companies sell. And initial reports suggest that tariffs between China and the U.S. will be lowered but not disappear, suggesting there could be a long-term drag on earnings from here.

These are three top operators, but they are also businesses that are boxed in by the health of their end markets. Investors can do well investing in these sorts of cyclical stocks, but they need to be patient. Those buying in today should be prepared for turbulence up ahead.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Deere & Company. The Motley Fool recommends Toro. The Motley Fool has a disclosure policy.

Why Heavy Equipment Stocks Gained Ground Today was originally published by The Motley Fool