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

Charles Schwab released its second-quarter earnings report on July 21. Here’s Morningstar’s take on Charles Schwab’s earnings and stock.

Key Morningstar Metrics for Charles Schwab

• Fair Value Estimate
  : $124.00
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Charles Schwab’s Q2 Earnings

Charles Schwab reported strong second-quarter 2026 results on the back of market and trading activity tailwinds, generating $7.08 billion in net revenue—up 21% annually—and $1.62 in adjusted diluted EPS, up a striking 42% from the year-ago period.

Why it matters: We’ve adopted a far more constructive stance regarding the prospects of Schwab’s first-party wealth management business, which is a growing priority. After another quarter of outstanding growth in inflows (up 53% annually), we’ve meaningfully increased our forecast growth in fee-based assets under management to 12.2% annualized from 7.2% previously and nudged up the realization rate as more of those come from the more lucrative Schwab Wealth Advisory channel.

• While the increased emphasis on SWA naturally increases tension with the firm’s RIA custody clients, we believe that a balanced approach between maintaining a healthy Schwab Advisor Network referral pipeline and continuing to invest in RIA-facing services like alternative asset access through Forge Global, a growing bank lending offering, and more advanced tax planning should keep that tension at a low simmer.

The bottom line: As we digest second-quarter results, we’ve raised our fair value estimate for wide-moat Charles Schwab to $124 from $117, reflective of our revised wealth management forecasts, stronger-than-expected quarterly results, and time value.

• Overall, we’re quite constructive regarding Charles Schwab’s current competitive position and its product roadmap. The firm looks set to continue to benefit from strong market growth in both the retail brokerage and wealth management channels and is appropriately leveraging its scale to develop new capabilities and deepen its relationships with clients.
• Schwab remains a compelling growth-at-scale story, with our forecasts calling for 10.0%, 11.3%, and 13.7% 10-year compound annual growth in net revenue, operating income, and diluted EPS, up modestly from our prior update.

The following are excerpts from Morningstar’s company report on Charles Schwab.

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 $124 after digesting the firm’s second-quarter earnings results. Specifically, a more constructive outlook on the prospects of the firm’s fee-based managed investing business, stronger-than-expected quarterly results amid a strong market and trading activity backdrop, and time value drove this revision.

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). We take an optimistic view of the firm’s ability to grow its balance sheet, projecting Charles Schwab Bank to approach $900 billion in deposits within a decade, or roughly 3.25% of total projected US retail deposits in that year. This outlook could change if the firm takes a more proactive approach to using third-party sweep arrangements, although we view this as unlikely in a higher interest rate environment.

Read more about Charles Schwab’s fair value estimate.

Economic Moat Rating

We believe Schwab has a wide 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 9.5% 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 US, the firm is one of a handful of financial-services operators that we expect to emerge as long-term winners in a heavily fragmented industry that continues to consolidate amid fee compression and customer expectations for higher service levels at a lower cost.

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.

From an asset quality perspective, Schwab’s security book is fairly conservative, with a preference for low-risk securities, government-backed MBS, and Treasuries. In the loan book, conservative underwriting and overcollateralization have underpinned very modest credit risk, even during the global financial crisis. We expect its long-term dividend payout target to gradually increase over time, but note that elevated share repurchases are unlikely during periods of elevated balance sheet growth. Over the very long term, we expect the firm’s total payout ratio to increase as its balance sheet growth slows.

Read more about Charles Schwab’s financial strength.

Risk and Uncertainty

We assign Schwab a Medium Uncertainty Rating, reflecting both our quantitative model and our qualitative assessment of the firm’s risk profile. In our view, 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. As a historically asset-sensitive institution, Schwab faces falling loan yields when interest rates decline. The firm has, at times, significant exposure to mortgage-backed securities prepayment risk, driving faster repricing at lower interest rates than portfolio duration would suggest during periods of falling rates.

Unlike many of its banking peers, Schwab carries a significant amount of cash flow uncertainty tied to client cash sorting, which is countercyclical. When customers carry a larger proportion of money market funds (instead of idle cash), the firm’s bank deposit base declines, and it may be forced to curtail investments in profitable loans and securities to maintain targeted regulatory capital levels.

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. While potentially financially material, we view these risks as limited, considering historical precedent and the lack of fiduciary responsibility at Schwab’s brokerage segment.

Read more about Charles Schwab’s risk and uncertainty.

SCHW Bulls Say

• Schwab could drive strong organic asset growth by expanding into alternative investments, expanding its lending products, or making similar platform investments over time.
• Consumers’ growing, if nascent, desire to consolidate financial relationships could benefit scaled players like Schwab, which had nearly $12 trillion in client assets at year-end 2025.
• Increases in retail trading activity could prove structural rather than cyclical, allowing the more profitable portion of Schwab’s business to outgrow its RIA segment.

SCHW Bears Say

• A return to zero-interest-rate policy would pose a material headwind for Schwab’s net interest margin and net interest income 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 higher deposit costs tied to artificial intelligence-enabled cash management tools could hurt Schwab’s net interest income generation.

This article was compiled by Irza Waraich.