Profit margins don't expand forever. We've seen extraordinary corporate profitability over the past decade — aided by low rates, buybacks, and operating leverage. But margins are mean-reverting. When labor costs rise, input prices squeeze, and pricing power fades, margins compress. That's not bearish doom — it's cycles.
The question isn't if margins will revert, but when and how fast. If we're at peak expansion, multiples need to adjust or earnings need to keep climbing at an unsustainable pace. History says neither works out well.
Watch ROIC, not just revenue growth. Watch free cash flow, not just EBITDA. The companies that survive margin compression are the ones with real moats and capital discipline.
The question isn't if margins will revert, but when and how fast. If we're at peak expansion, multiples need to adjust or earnings need to keep climbing at an unsustainable pace. History says neither works out well.
Watch ROIC, not just revenue growth. Watch free cash flow, not just EBITDA. The companies that survive margin compression are the ones with real moats and capital discipline.
