After Earnings, Is Schwab Stock a Buy, a Sell, or Fairly Valued?

Charles Schwab released its first-quarter earnings report on April 16. Here’s Morningstar’s take on Schwab’s earnings and stock.

Key Morningstar Metrics for Charles Schwab

• Fair Value Estimate
  : $114.00
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Charles Schwab’s Q1 Earnings

Schwab reported strong quarterly results, generating 16% sales growth, 38% growth in adjusted EPS, and attracting an outstanding $140 billion in net new client assets. Still, shares traded down by a mid-single-digit percentage during April 16 trading on cash-sorting fears.

Why it matters: Schwab is the low-cost operator in the retail brokerage and registered investment advisor custody space, and we believe it will emerge as a long-term winner as a result, regardless of the ultimate vehicle of customer monetization. We’ve seen the firm reinvent its model twice already; first with asset management through its first-party funds and mutual fund marketplace, and second through Schwab Bank.

• Concerns seem to center on JPMorgan Chase’s planned launch of an artificial intelligence cash management tool, alluded to in Jamie Dimon’s annual letter to shareholders. The comments seem to portray that product as evolutionary rather than revolutionary, with Dimon suggesting that high-net-worth clients are already adept at cash sorting and that competition for customer deposits is already intense.
• We don’t expect Schwab to see material pressure here. The rates paid on sweep deposits are very low—just 0.19% during the quarter—but also comprise less than 4% of customer assets. Customers seem to accept that low cash sweep rates are the ticket to admission for an otherwise free, robust ecosystem of services that Schwab provides. If the bank’s cost of funding were to tick up, those services would invariably need to be monetized in other ways.

The bottom line: As we digest results, we’ve raised our fair value estimate to $114 from $111, due to quarterly outperformance and a more constructive expected short-term interest rate environment.

Key stats: The firm’s $5.6 billion in revenue and $1.43 in adjusted EPS edged our respective $5.5 billion and $1.27 estimates, driven by better-than-expected 15% growth in asset management and 20% growth in trading revenue.

Fair Value Estimate for Charles Schwab

With its 4-star rating, we believe Schwab’s stock is moderately undervalued compared with our long-term fair value estimate of $114, increased from $111 after digesting first-quarter results. Our revised valuation corresponds with a price/2026 earnings ratio of 19.3 times and a price/book ratio of 4.8 times.

Our long-term outlook for the firm remains quite constructive, with our forecasts calling for a 10-year compound annual growth rate of 12% to 13% in earning assets and 13% to 14% in net interest income (driven by modest net interest margin expansion). Despite slower growth in trading commissions and asset management revenue, this results in a 9% 10-year compound annual revenue growth forecast.

Read more about Charles Schwab’s fair value estimate.

Economic Moat Rating

We believe Schwab has a wide economic moat, rooted in a durable cost advantage that we expect to persist for at least the next two decades. Our view is corroborated by an average annual return on tangible equity of 21% over the past decade, comfortably exceeding our estimated 8.8% cost of equity for the firm.

With $11.9 trillion in client assets at the end of 2025 representing about 15% of the firm’s self-assessed addressable market in the United States, Schwab is one of a handful of financial-services operators that we expect to emerge as long-term winners in a heavily fragmented industry. We believe that Schwab has a defensible cost advantage in its brokerage and bank businesses, which are now inextricably intertwined. Most important, in our view, is the operating efficiency of Charles Schwab Bank, which stands head and shoulders above peers of similar size. Since inception, the bank’s operating efficiency ratio, or noninterest expense as a proportion of revenue, has averaged 20%-30%, compared with US bank averages in the high 50s.

Read more about Charles Schwab’s economic moat.

Financial Strength

We view Schwab’s financial position as strong. The firm is well capitalized, targeting a Tier 1 leverage ratio of 6.75%-7.00%, comfortably ahead of the 5% threshold for well-capitalized banks and the minimum 4% regulatory requirement. Near-term debt maturities at the corporate level are modest and should be comfortably serviceable with cash flow from operations. Further, the firm maintains access to a handful of liquidity backstops, including a $5 billion commercial paper authorization, Federal Home Loan Bank borrowing capacity, repurchase agreements, credit lines with third-party banks, a standing shelf registration with the SEC, and access to the Federal Reserve borrowing window.

Read more about Charles Schwab’s financial strength.

Risk and Uncertainty

We assign Schwab a Medium Uncertainty Rating. Schwab’s principal risk exposure stems from interest rate sensitivity, with secondary exposures to customer cash sorting, equity market levels, customer trading activity, and the regulatory environment.

Consistent with many financial services firms, Schwab is sensitive to interest rate risk, with a 25-basis-point federal-funds rate cut corresponding to a $250 million-$300 million reduction in net interest revenue, or roughly 2%-3% of 2025 net interest income. Unlike many of its banking peers, Schwab carries substantial cash flow uncertainty, tied to client cash sorting, which is countercyclical. When interest rates are highest and lending is most profitable, customers carry a larger proportion of money market funds, and the bank may be forced to curtail investments in profitable loans and securities to maintain targeted regulatory capital levels. Schwab’s trading and asset management businesses tend to correspond—at least in the long haul—with US economic prospects.

The only material environmental, social, and governance risk we identify for Schwab ties to the potential for litigation or regulatory change regarding the firm’s cash sweep practices, which we consider unlikely.

Read more about Charles Schwab’s risk and uncertainty.

SCHW Bulls Say

• Schwab could drive strong organic asset growth by adding alternative investments, expanding lending products, and similar platform investments.
• Stronger-than-expected growth in Schwab’s managed investments portfolio or nascent alternative asset initiatives could more than offset fee rate declines in managed products and a mix shift away from (more profitable) OneSource assets under management.
• Increases in retail trading activity could prove structural rather than cyclical, allowing the more profitable half of Schwab’s business to outgrow its RIA segment.

SCHW Bears Say

• A return to a zero-interest-rate policy would pose a material headwind for Schwab’s net interest margin and revenue growth prospects.
• Regulatory changes could meaningfully affect Schwab’s business model. Any that target the firm’s cash sweep model would be particularly painful.
• Structurally lower customer cash balances or structurally higher deposit costs, tied to AI-enabled cash management tools, could hurt Schwab’s net interest income generation capacity.

This article was compiled by Jillian Moore.