Caterpillar's (CAT  ) second-quarter results were highly anticipated as it would give some insight into the health of the global economy particularly in terms of construction, manufacturing, and industrial activity. Additionally, the stock has been quite strong, since the March bottom, which is inconsistent with the prevailing narrative.

Caterpillar's earnings didn't give a decisive answer to this question. The company beat relative to expectations and showed improvement every month, however, the numbers were off by a significant margin from 2019. Thus, it's pretty surprising that Caterpillar's share price is about 7% higher today than it was a year ago. It only makes sense if investors expect continued improvement.

Inside the Numbers

In the second quarter, Caterpillar posted $1.03 in earnings per share on $10 billion of revenue. This was a 31% decline in revenue from $14 billion in the second quarter of 2019. But, it was above analysts' expectations of $9.4 billion.

Weakness in demand for its products due to the pandemic led dealers to cut inventories by $1.4 billion. Its geographic performance also mirrored the spread of COVID-19 as Asian and Pacific regions showed a 10% decline, while North America had a 54% decline.

Caterpillar pulled its guidance earlier this year and didn't provide any updates. However, analysts are expecting Caterpillar to earn $5.19 per share in 2020 with some recovery in the third and fourth quarters. Before the coronavirus, the company was projecting EPS between $8.50 and $10 per share.

Stock Price Impact

One hypothesis that can reconcile Caterpillar's strong stock market performance with its lagging financials is that as long as the numbers are moving in the right direction, investors won't punish the stock. This was the case out of the 2009 bottom as well, when there was a considerable amount of uncertainty and confusion about the weak economy and rising share price.

Over the last 3 years, Caterpillar's stock has been range-bound between $110 and $150. It makes sense due to the deceleration in global growth over this period and an increase in trade tensions. Over this time, the company's dividend continued to increase. One bullish development for the stock is the increase in fiscal stimulus with infrastructure projects being one outlet for this stimulus. Other commodities linked to global growth like copper and iron ore have also been strong, moving past their coronavirus highs.

The stock was lower by 2.8% on Friday, however, the drop didn't meaningfully alter its trajectory. It's been in a strong uptrend since the March lows with a 52.7% gain. Caterpillar pays a 3.1% dividend which is well above the average stock in the S&P 500 (SPY  ) and above Treasury yields.