By Gregory Daco and Josh Putnam
Volatility used to be episodic. Today it is structural. Inflation shocks, geopolitics, capital market repricing, and shifting supply chains no longer arrive as surprises—they define the operating environment.
Yet while many companies see margins erode amid uncertainty, a small group consistently pulls ahead. Their advantage is not timing, luck, or scale. It is design.
New research analyzing more than 1,000 U.S. companies over multiple economic cycles reveals a sobering truth: Only about 10% consistently deliver top‑quartile margins. Even more striking, these companies sustain margin leadership across downturns, rate resets, and geopolitical shocks. While most companies treat margin pressure as temporary, these leaders treat margin resilience as a core feature of their business strategy.
The implication for executives is clear: Margin performance is no longer a financial outcome—it is a strategic choice.
The Strategic Architecture of Margin Leaders
Only the top 10% of public companies have consistently delivered EBITDA margins that outperform their industry peers, EY‑Parthenon analysis shows. Top performers sustain structurally higher margins year after year, even during periods of macroeconomic and geopolitical stress. By contrast, lower performers experience sharp margin compression during shocks and fail to recover fully.
EBITDA margin evolution for assessed cohort of U.S. public companies (2010–2024)
This divergence isn’t explained by industry mix alone. Margin leaders are found across sectors, whether industrials, consumer products, technology, or financial services. What distinguishes margin leaders is a shared strategic DNA built around five common reinforcing principles:
1. Low capital intensity and high asset productivity. Margin leaders generate more profit per dollar of capital deployed. By minimizing fixed‑asset drag and optimizing working capital, they preserve flexibility when markets reprice risk.
2. Recurring revenue and customer lock‑in. These firms prioritize business models that smooth revenue volatility—subscriptions, long‑term contracts, and embedded services—reducing sensitivity to short‑term demand swings.
3. Pricing power through differentiation. Rather than competing on volume, leaders invest in defensible differentiation that allows them to pass through cost increases without destroying demand.
4. Operational discipline that protects growth margins. Scale efficiency matters, but only when paired with rigorous cost governance. Margin leaders avoid “growth at any price” traps that dilute profitability.
5. Active portfolio management. Margin leaders continuously reallocate capital, divesting subscale or margin‑dilutive assets while doubling down on advantaged businesses.
Importantly, these levers are mutually reinforcing. Pricing power is unsustainable without differentiation. Recurring revenue loses value without operational discipline. Margin leadership is systemic, not siloed.
How Markets Reward Strategic Clarity
Equity markets price uncertainty in real time. Nowhere is that clearer than during macroeconomic and geopolitical inflection points.
A recent EY-Parthenon analysis of daily S&P 500 returns from 1981 through 2025 reveals how markets reward transparency and penalize ambiguity. The excess return of equities over safer assets plunges in times of geopolitical stress and rises when there’s greater clarity following macroeconomic and U.S. Federal Reserve policy announcements.
Equity markets penalize ambiguity, reward transparency
Source: EY‑Parthenon analysis of nearly 45 years of S&P 500 data, Sep 1981–Oct 2025, measuring the equity premium as the excess return over the three-month Treasury bill.
Market reactions to macroeconomic announcements, Federal Reserve decisions, and geopolitical shocks show a consistent pattern: Companies with clear, resilient margin profiles experience less valuation volatility, while structurally weaker firms face sharper repricing.
For executives, this principle reframes margin resilience as a capital markets issue, not just an operating one. Transparency around how enterprises protect, sustain, and grow margins has become central to valuation credibility, transaction readiness, and investor confidence.
Margins Are a Leadership Test
The findings of this analysis challenge a deeply held assumption in many boardrooms: that margins will normalize when conditions stabilize. The data suggests the opposite. In structurally volatile markets, margin leaders pull further ahead while laggards fall into persistent underperformance cycles.
This creates a stark choice for leadership teams. Either margins are treated as just another financial metric, managed reactively through cost cuts and one‑off initiatives, or they are designed deliberately through strategic architecture.
The latter requires uncomfortable trade‑offs: walking away from capital‑heavy growth, sunsetting legacy offerings, and resisting price‑led competition. But the payoff is not just higher margins—it is resilience, valuation stability, and strategic freedom.
Four Actions to Take Now
To move from margin defense to margin leadership, leaders should focus on four priorities:
1. Audit margin drivers structurally, not tactically. Go beyond cost reviews. Identify which parts of the business structurally earn returns above the cost of capital—and which never will.
2. Embed pricing power into strategy, not negotiations. Invest in differentiation, data, and value communication that allow proactive pricing decisions.
3. Redesign portfolios for resilience, not scale. Actively rotate capital toward businesses with recurring revenue, lower capital intensity, and defensible economics—even if it slows top‑line growth.
4. Align leadership incentives with margin quality, not just growth. Reward sustained profitability, not volume expansion that erodes long‑term returns.
Gregory Daco is the EY-Parthenon Chief Economist.
Josh Putnam is the EY-Parthenon 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 the views of the authors and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.
