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

Charles Schwab released its third-quarter earnings report on Oct. 15. Here’s Morningstar’s take on Charles Schwab’s earnings and stock.

Key Morningstar Metrics for Charles Schwab

• Fair Value Estimate
  : $123.00
• Morningstar Rating
  : ★★★★
• Morningstar Economic Moat Rating
  : Wide
• Morningstar Uncertainty Rating
  : Medium

What We Thought of Charles Schwab’s Q3 Earnings

Schwab reported solid third-quarter results, with $7.2 billion in quarterly revenue (up 17% year over year) and $1.69 in adjusted diluted earnings per share (up 29%), as it makes progress on the strategic initiatives laid out in its 2026 investor day, including expanding its product offerings. Shares fell modestly after the release, sliding more than 7% over three sessions.

• After digesting the results, our two key takeaways are that Schwab’s core business is extremely healthy, exhibiting no signs of intensifying competitive pressure that would support the artificial intelligence disruption narrative, and that a modest top-line miss and a (prudent) move to proactively shore up the balance sheet were responsible for the market’s tepid reaction.
• The firm’s asset gathering was robust, with $190.4 billion in core net new assets (5.8% annualized), while engagement remains strong across the Schwab ecosystem. The firm saw 59% growth in pledged asset lines and 35% growth in bank loans, a key strategic priority as Schwab works to deepen touchpoints with clients and diversify its earning asset book.
• While client cash balances declined 10 basis points sequentially to 8.9% of assets, balances remain around where we would expect, considering higher short-term interest rates and strong equity market performance, both of which correlate with leaner cash holdings.
• It was interesting to see Schwab add roughly $5.5 billion in more expensive short-term borrowing and long-term debt from a quarter ago (average balances), weighing on its net interest margin, which expanded very modestly to 3.04%. We view this as a prudent measure that assuages concerns about the impact of unrealized securities losses as long-term interest rates push higher. However, the net effect is slightly dilutive to net interest margins and returns.

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 stock is moderately undervalued compared with our long-term fair value estimate of $123 per share, corresponding to a 2027 price/earnings ratio of 17.5 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%-13% in earning assets and 14%-15% in net interest income. Despite slower growth in trading commissions and asset management revenue, this results in a 9.6% 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 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.

The retail broker and wealth management custodian’s status as a premier asset gatherer, its ability to fractionalize investments in platform services across a massive asset base, and synergies across its brokerage and banking businesses have resulted in industry-leading expense ratios and swelling pretax operating margins, even as Schwab passes through a good chunk of those savings to its customers.

With the company enjoying a leading position serving the two fastest-growing markets in financial services—retail investors and registered investment advisors—we expect Schwab to generate excess returns for the foreseeable future.

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% regulatory requirement. Near-term debt maturities at the corporate level are modest and should be comfortably serviceable with cash flow from operations.

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.

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 to net interest revenue, or roughly 2%-3% of 2025 net interest income.

Read more about Charles Schwab’s risk and uncertainty.

SCHW Bulls Say

• Schwab could drive strong organic asset growth with expansion into alternative investments, expansion of lending products, and similar platform investments over time.
• Consumers’ growing 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 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 artificial intelligence-enabled cash management tools, could hurt Schwab’s net interest income generation capacity.

This article was compiled by Colin Laidley.