Ahead of Earnings, Is Charles Schwab Stock a Buy, a Sell, or Fairly Valued?

Charles Schwab is set to release its fourth-quarter 2026 earnings report on Jan. 21. Here’s Morningstar’s take on what to look for in Charles Schwab’s earnings and the outlook for its stock.

Key Morningstar Metrics for Charles Schwab

• Fair Value Estimate: $109.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

Charles Schwab Earnings Release Date

• Wednesday, Jan. 21, before the start of trading

What to Watch for in Charles Schwab’s Q4 Earnings

• Given Schwab’s macroeconomic forecasts, the firm’s annual guidance is uniquely interesting in its fourth-quarter earnings. We’ll also get some sense of the reinvestment needs for the core business and the degree of operating leverage we should expect in 2026, along with some indication of the likely range for net interest margin (one of the core valuation drivers for the business).
• Investors should also keep an eye on guidance for net new asset growth, which has clocked in below the firm’s 5%-7% long-term guidance for some time as it digests its TD Ameritrade acquisition. A return to that range might be received positively by the market.
• The firm has been adding advisor headcount, so we’re tracking growth here, particularly relative to total client assets or growth in first-party AUM. In the same vein, we like to keep an eye on how growth in that business trends relative to the more hands-off wealth products like Schwab Intelligent Portfolios, as we view SWA as stickier and SIP as a proxy for robo-advisory interest and engagement.
• We’ll observe progress toward launching new digital products like cryptocurrency trading and custody. Schwab clients are already the largest holders of Bitcoin ETFs with 20%-25% AUM share, so it will be interesting to see the extent to which digital assets feature on the platform. As we understand it, that’s set to launch in 2026. It will also be interesting to hear about their approach to pricing, if disclosed, as the spreads in that business can be quite high for retail investors (15-20 basis points or more).

Fair Value Estimate for Charles Schwab Stock

With its 3-star rating, we believe Charles Schwab’s stock is fairly valued compared with our long-term fair value estimate of $109 per share. A faster-than-expected paydown of high-cost borrowing drove net interest margins up 21 basis points sequentially to 2.86%, which suggests higher net interest income growth prospects than we’d forecast. Organic asset growth of 4.2% topped our 4.1% estimate.

Given this, management’s commentary regarding increasing appetite to deploy capital through Charles Schwab Bank, and strong capital markets returns, we view our projections for 25% five-year compound annual growth in net interest income and 13.5% growth in client assets over that period as achievable. The combination of quarterly earnings outperformance, a slight upward revision to our long-term revenue and pre-tax profit growth expectations (to 11.5% and 15.1% over 2024-34 from 11.3% and 14.8%), and time value underpins the valuation increase. Our fair value estimate corresponds to a 2026 price/earnings ratio of 18.3 times and price/book ratio of 3.4 times.

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 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 in the US, 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.

Schwab’s status as a premier asset gatherer, its ability to fractionalize investments in customer acquisition and platform services across a massive asset base, and synergies across its retail brokerage and banking businesses have resulted in industry-leading expense ratios and swelling pretax operating margins, even as the firm passes through a good chunk of those savings to its customers. With the firm enjoying a strong position in the two fastest-growing markets in financial services—registered investment advisors and retail investors—we expect Schwab to generate economic profits 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%, 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 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. Roughly 89% of 2024 mortgage originations were to borrowers with FICO scores north of 740, and 69% had a loan/value ratio of 70% or less, suggesting that this conservative underwriting culture prevails.

Schwab retains a substantial share of its earnings to support balance sheet growth, particularly during periods of deposit accumulation. As a result, its long-term dividend payout target of 20%-30% and total payout ratio of roughly 40% over the past decade are significantly behind those of many peers. We expect this 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 exposure to customer cash sorting, equity market levels, and customer trading activity.

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 $350 million-$450 million reduction to net interest revenue, or roughly 4%-5% of 2024 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 declining rates.

Unlike many of its banking peers, Schwab carries a substantial amount of cash flow uncertainty tied to client cash sorting, which is countercyclical. When customers carry a larger proportion of money market funds (in lieu 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. This tends to occur when interest rates are highest and lending is most profitable. Trading volume and index levels affect Schwab’s trading and asset management businesses, respectively, and 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. 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 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 Rachel Schlueter.