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

Charles Schwab is set to release its second-quarter 2025 earnings report. Here’s Morningstar’s take on what to look for in Schwab’s earnings and our outlook for the stock.

Key Morningstar Metrics for Charles Schwab

• Fair Value Estimate: $97.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

Charles Schwab Earnings Release Date

• July 18, 2025, after the close of trading

What to Watch for in Charles Schwab’s Q2 Earnings

• Cash sweep trends: Schwab’s bank is funded predominately with low-cost sweep cash from its retail brokerage. After troughing in November 2024 at 9.5% of client assets, it gradually recovered to 10.6% and February and 10.5% in April this year, but it gave back about 40 bps in May. We’ll be interested to hear management’s commentary regarding this point. Should this be considered a net positive, as retail clients are turning “risk on” and deploying cash? Or should we be worried about cash-sorting behavior returning?
• Net interest margin guidance: With the firm redeeming more expensive Series G preferred shares and paying down its bank loan balances (taken out in May 2023), NIMs should continue to march higher. We’ll be interested to see whether management moves its full-year target for 2.55% to 2.65%, with projected rate cuts moving into the back half of the year. In the longer term, we still see significant upside as the firm’s securities portfolio reprices. It extended duration at exactly the wrong time in 2020 and 2021.
• Commentary regarding emerging financial products: The firm is very methodical about offering new investable products, given its brand and reputation for looking out for Main Street investors.
• Schwab valuation: We think that current prices look fair, and trade within a range we’d consider fairly valued relative to our $97 fair value estimate. On a relative basis, it looks fairly attractive, as the median bank in our coverage trades at around a 20%-25% premium to its fair value estimate. That’s probably attributable to timing; a lot of the firm’s net interest margin expansion comes beyond the one-to-three-year horizon that most sell-side analysts consider in their forecasts, as the firm’s securities book takes years to fully reprice.

Fair Value Estimate for Charles Schwab

With its 3-star rating, we believe Charles Schwab stock is fairly valued compared with our long-term fair value estimate of $97 per share. With the firm maintaining its full-year targets and few changes to our long-term expectations, our intrinsic valuation is intact. Our fair value estimate corresponds to a price/earnings ratio of 23.5 times and price/book ratio of 5.3 times. The key drivers of Schwab’s valuation are its net interest margin, balance sheet growth, growth in assets under management, asset-management take rate, and pretax operating margin.

Read more about Charles Schwab’s fair value estimate.

Economic Moat Rating

We believe Schwab has a wide moat, rooted in a 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 19% over the past decade, comfortably exceeding the firm’s 9% cost of equity. With $10.1 trillion in client assets at the end of 2024 representing 13%-14% market share of an estimated $75 trillion addressable market, the firm is one of a handful of financial services operators that we expect to emerge as long-term winners in an 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 5.00% threshold for well-capitalized banks and the minimum 4.00% 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 US Securities and Exchange Commission, and access to the Federal Reserve borrowing window.

Read more about Charles Schwab’s financial strength.

Risk and Uncertainty

We assign Schwab a High 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 exposure to customer cash sorting, customer trading activity, and equity market levels.

Read more about Charles Schwab’s risk and uncertainty.

SCHW Bulls Say

• Schwab could continue to drive organic asset growth with expansion into alternative investments, expansion of lending products, and similar platform investments over time.
• Stronger-than-expected growth in Schwab’s managed investments portfolio 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 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.
• The firm could struggle to expand its profitable loan book in line with its balance sheet, resulting in a higher mix of mortgage-backed securities or third-party deposit sweeps.

This article was compiled by James Ubi.