Gregory Daco and Josh Putnam
Previously, volatility was temporary. Today is structural. Inflation shocks, geopolitics, capital market repricing, and supply chain changes are no longer surprising; they define the operating environment.
But while many companies are seeing their profit margins shrink amid uncertainty, a small number of companies are consistently forging ahead. Their advantage is not timing, luck, or scale. It’s the design.
A new study that analyzed more than 1,000 U.S. companies across multiple business cycles reveals the hard truth: only about 10% consistently deliver top-quartile profitability. Even more impressively, these companies have maintained their margin leadership through recessions, interest rate resets, and geopolitical shocks. While most companies treat margin pressure as temporary, these leaders treat margin resiliency as a core business strategy.
The implications for management are clear. Profitability performance is no longer a financial outcome, but a strategic choice.
Margin Leader Strategic Architecture
According to EY‑Parthenon analysis, only the top 10% of publicly traded companies consistently achieve higher EBITDA margins than their peers. Top performers maintain structurally strong returns year after year, even during times of macroeconomic and geopolitical stress. In contrast, low-performing firms experience sharp margin contractions during shocks and fail to fully recover.
Trends in EBITDA margin for the evaluation cohort of US listed companies (2010-2024)
This difference cannot be explained by industry composition alone. Profit margin leaders exist in a variety of sectors, including industrials, consumer products, technology, and financial services. Margin leaders are characterized by a common strategic DNA built around five common strengthening principles:
1. Low capital intensity and high asset productivity. Margin leaders generate more profit per dollar of capital invested. Minimize fixed asset resistance and optimize working capital to maintain flexibility as markets reprice risk.
2. Recurring revenue and retaining customers. These companies are prioritizing business models that smooth revenue fluctuations, such as subscriptions, long-term contracts, and embedded services, reducing their sensitivity to short-term demand fluctuations.
3. Pricing power through differentiation. Rather than competing on volume, leaders invest in defensible differentiation that can weather cost increases without destroying demand.
4. Operating discipline to protect growth margins. Scale efficiency is important, but only when combined with strict cost governance. Margin leaders avoid the “growth at any price” trap that undermines profitability.
5. Active portfolio management. Margin leaders continually reallocate capital, selling subscale and margin-dilutive assets while doubling down on profitable businesses.
Importantly, these levers are mutually reinforcing. Pricing power cannot be maintained without differentiation. Recurring revenue loses value without operational discipline. Margin leadership is systemic and not siloed.
How does the market reward strategic clarity?
Stock markets measure uncertainty in real time. Nowhere is this more evident than during a time of macroeconomic and geopolitical inflection points.
A recent EY Parthenon analysis of daily S&P 500 returns from 1981 to 2025 reveals how the market values transparency and penalizes ambiguity. The excess return of stocks relative to safer assets falls sharply during periods of geopolitical stress and rises when there is greater clarity in the macro economy and in response to U.S. Federal Reserve policy announcements.
Stock markets punish ambiguity and reward transparency
Source: EY‑Parthenon analysis of approximately 45 years of S&P 500 data from September 1981 to October 2025. We measure the equity premium as the excess return over three-month Treasury bills.
There are consistent patterns in market responses to macroeconomic announcements, Federal Reserve decisions, and geopolitical shocks. This means companies with clear and resilient margin profiles will experience less valuation volatility, while structurally weaker companies will face more severe price changes.
For managers, this principle reframes margin resilience as a capital markets issue rather than just an operating issue. Transparency about how companies protect, maintain and grow profit margins is central to valuation credibility, deal readiness and investor confidence.
Margin is a leadership test
The results of this analysis challenge the deeply held assumption in many boardrooms that margins will normalize once conditions stabilize. Data suggests the opposite. In structurally volatile markets, margin leaders continue to move further ahead, while laggards find themselves in a cycle of persistent underperformance.
This presents tough choices for leadership teams. Profitability is treated as just another financial metric, managed reactively through cost reductions and one-time initiatives, or intentionally designed through strategic architecture.
The latter requires uncomfortable trade-offs, such as moving away from capital-intensive growth, discontinuing traditional products, and resisting price-driven competition. However, the results are not just about improving profit margins. Gain resilience, reputational stability, and strategic freedom.
4 actions to take now
To move from margin defense to margin leadership, leaders must focus on four priorities:
1. Audit profit drivers structurally rather than tactically. Go beyond cost review. Identify which parts of your business will structurally generate returns above your cost of capital and which parts will never make a profit.
2. Incorporate pricing power into your strategy rather than negotiation. Invest in differentiation, data, and value communication to enable aggressive pricing.
3. Redesign your portfolio to focus on resiliency, not scale. Even if sales growth slows, we actively rotate capital into businesses with recurring revenues, low capital intensity, and defensible economics.
4. Align leadership incentives to the quality of profits, not just growth. Focus on sustainable profitability rather than volume expansion that hurts long-term profits.
Gregory Daco is Chief Economist at EY Parthenon.
Josh Putnam is EY-Parthenon’s global and Americas corporate finance leader.
Click here to access the full EY-Parthenon analysis on margin resilience.
The views reflected in this article are those of the author and do not necessarily reflect the views of Ernst & Young LLP or other members of the EY global organization.
