Iran war could push companies to rebuild inventories, with broader implications for profitability and stock valuations

Confluence Investment Management said its asset allocation products are managed using a “top down,” or macro, approach, with bi-weekly updates published every other Monday alongside an accompanying podcast. In its latest report, the firm argues that the US-Israeli war against Iran, launched on February 28, is likely to influence corporate behavior in the long term—particularly by encouraging companies to rebuild higher inventories to protect against supply disruptions and associated price spikes.

Why inventories may rise again

The report notes that the inflation-adjusted value of US private-sector inventories as a share of GDP has generally trended downward since the end of World War II, reflecting a long-running shift toward lower inventory holdings relative to sales. Confluence attributes this decline to multiple factors, including:

• High inventory levels during World War II and the Korean War, which it says likely reflected hoarding amid limited consumer sales.
• Normalization after those conflicts ended, as supply dynamics improved and consumer spending rebounded.
• Improvements in transportation that reduced delivery times and freight costs.
• Advances in information technology that improved firms’ ability to optimize inventory levels.
• The end of the Cold War, which the firm says reinforced the belief that global peace was at hand and supported just-in-time inventory management under globalization.

Confluence also links the reduced need for inventories to the decline in price inflation beginning in the early 1980s. It points to the Federal Reserve under Chair Paul Volcker raising interest rates and Congress passing deregulation measures that it says reduced price pressures. The firm adds that rising inflation in the 1960s and the energy crises of the 1970s corresponded with a jump in inventory holdings, with inventories later falling after the US housing crisis. Once the recovery began, inventories climbed back to almost 14% of GDP.

War-driven supply shocks could extend the inventory rebound

Based on this historical pattern, the firm argues that as management internalizes commodity supply shocks and rising prices tied to the Iran war, companies are likely to rebuild inventories. Confluence further suggests that broader geopolitical shifts—described as a US retreat from hegemony, global fracturing, and increased international tensions—could make the inventory rebound larger and longer lasting than the one seen in the early 2000s.

The report also states that the trend may not be limited to the US, arguing that companies globally could face incentives to increase inventory holdings again.

Which sectors could be most affected

Confluence says it examined the US Census Bureau’s monthly business sales and inventory data in nominal terms to track inventory-to-sales ratios by sector. It reports that the rise in the overall inventory/sales ratio since the early 2000s has been driven by higher manufacturing stockpiles, which the firm says is consistent with the idea that supply disruptions and higher input and component costs may matter more for manufacturers than for wholesalers or retailers.

Looking ahead, the firm expects the Iran war to especially boost inventory holdings at the factory level.

Potential investment and economic implications

The report argues that a broad, sharp rise in manufacturers’ inventories would have investment implications. It says holding more inventories ties up more capital and increases costs, which could lead investors to assign higher valuations to manufacturing firms that can better control their inventory levels, all else being equal.

Confluence also connects its inventory view to industrial and logistics effects. It says that because the US is now a net energy exporter and has higher levels of secure supplies of oil, gas, and other key commodities, it expects some foreign manufacturers to move production to the US. The firm says this could help reindustrialize the US economy and stimulate business for US suppliers.

In addition, the need to store more inventory could increase demand for commercial warehouse space, supporting rents for firms that own such facilities. However, the report cautions that higher inventories generally imply a less efficient economy than a just-in-time system, which it says would likely keep price inflation higher and more volatile than in prior years, with similar implications for interest rates.

Source and authorship

Authored by Patrick Fearon-Hernandez and originally posted on Confluence Investment Management.