The Margin Squeeze Is Here – And Cutting Your Way Out Won't Work

From Nvidia to Nike, companies are discovering that revenue growth masks a profitability problem that can't be solved by layoffs alone

Among America’s 1,500 largest companies by market value, the typical non-financial firm increased both sales and operating profit by 6% in the third quarter. Investment banks are publishing 2026 outlooks predicting 14% earnings growth. Deutsche Bank and Morgan Stanley agree the pace should continue into 2027.

But beneath the headline numbers, something is off. At 394 of the 865 companies that grew revenue, the cost of goods sold rose faster—squeezing margins. Across four of ten main industry groups, sales and administrative costs outpaced revenue. Return on capital fell year-over-year in seven sectors.

Even Nvidia—the poster child of AI-driven growth—saw its gross, operating, and net profit margins tighten by three to six percentage points relative to a year ago. Executives at General Motors, Nike, and Starbucks fielded probing questions about profitability during their latest earnings calls.

The margin squeeze has arrived. And the instinctive response—cutting costs—may make things worse.

What’s Driving the Squeeze

Several forces are converging.

Input costs are rising faster than prices. The producer price index, a proxy for corporate costs, has at times outpaced the consumer price index by over five percentage points—one of the largest gaps in decades. Companies can’t pass through all their cost increases without losing customers, so margins compress.

Tariff uncertainty has disrupted planning. A survey of over 1,000 companies found that one-third reforecast their profitability numbers before the second half of 2025. The median expected EBITDA margin for 2025 shifted from 12% to 11.3%. Companies in the bottom quartile saw profitability projections drop 64%.

Labor costs remain elevated. Revenue per employee—one gauge of productivity—has grown more slowly than consumer prices at 630 companies in a recent analysis. In only three sectors (information technology, healthcare, and real estate) has the median business improved on this measure.

Competition limits pricing power. A Bain survey found 67% of companies cite competitive pressures and customer resistance as the biggest barrier to margin-enhancing pricing strategies. Without high inflation as a default justification for price increases, many are struggling to maintain pricing discipline.

The Cost-Cutting Trap

The instinctive response to margin pressure is cutting costs. At least seven companies with market caps above $10 billion that recorded sharp margin declines have announced layoffs this year, including Intel, Pfizer, and Mondelez.

But cost-cutting has limits—and dangers. McKinsey research found that companies that increased their profit margins for more than three consecutive years were rare, and those that kept pushing eventually cut into activities that benefited customers and brands.

One consumer-packaged-goods company increased profits at double-digit rates for seven years by emphasizing margin growth—even as revenues grew at only 2% a year. Eventually, it ran out of healthy opportunities to cut costs and began slicing into activities that damaged the business.

Another large company produced years of strong profit growth largely by increasing prices. That allowed competitors to step in with similar but less expensive products, cutting into market share. Margin improvement became market share loss.

Seven of ten non-financial sectors spent less on R&D as a share of revenue in the past four quarters than the year before. Nearly half the firms in the S&P 500 are reducing capital spending. The profits produced by these cuts may prove illusory if they make it harder to develop and manufacture products in the future.

What Actually Works

Companies that successfully navigate margin pressure share some common approaches.

Productivity over headcount. AI and automation investments that actually improve output per worker—not just reduce headcount—provide sustainable margin improvement. Companies integrating AI to support growth rather than just replace workers are seeing better results.

Pricing precision. Companies that invest in data-driven pricing guidance report winning more deals than they lose at 12% higher rates than others. Sales reps with dynamic data-driven guidance were almost twice as likely to be confident in realizing price increases. The companies confident they’ll push through price increases in 2025 show expected profit margin premiums of 3 percentage points over those that aren’t.

Expense capture before list price increases. Finding ways to capture more of the price already charged—examining discounts, allowances, rebates, and other deductions—is often less risky than outright list price increases.

Growth over margin optimization. Thinner margins aren’t always a problem if the top line keeps growing. Nvidia’s sales grow at an annual rate of 60% quarter after quarter; margin compression matters less when volume compensates. Companies with strong revenue growth have more flexibility than those trying to optimize a stagnant business.

The Path Forward

The margin pressure may ease in 2026. Import duties seem likely to moderate from current levels. Recent tax legislation brings favorable changes to R&D expensing, capital spending, and other investments. Interest rates are declining, which helps highly levered companies.

But the American economy may also slow. If CEOs defer the margin question until then, it will no longer be marginal. The time to address cost structures, pricing discipline, and productivity investments is when revenue growth provides cover—not when a slowdown makes every decision more painful.

The companies that will emerge strongest are those that find efficiency without sacrificing growth investment. That’s harder than cutting headcount or raising prices. It’s also the only approach that works sustainably.