Charles Schwab

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.

If we had any gripe with a stellar earnings report, it would be changes to verbiage regarding the firm's long-term net new asset growth outlook. Management now aims for "5% or more" long-term growth, from 5%-7%. This is worth noting, although we view the shift as trivial for our own modeling and fair value estimate, as we'd already forecast growth comfortably in the updated range over the near term and comfortably below that over the long-term.

Schwab's share price has recovered well from a challenging first quarter, with concerns regarding AI disruption driving sharp selloffs around discrete industry-specific events, from the launch of an advanced AI-supported tax planning tool by Altruist to the passing mention of JPMorgan Chase piloting an AI cash management tool in Jamie Dimon's annual letter to the launch of a tool by ChatGPT aimed at helping users with personal finances. We continue to view these concerns as overblown and encourage investors to read our recently published Stock Pitch report on Charles Schwab, which captures our thesis nicely.

We've increased our fair value estimate for Charles Schwab to $124 per share from $117 after digesting the firm's second-quarter earnings results. Specifically, a more constructive outlook regarding 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 updated intrinsic valuation corresponds with a price/2026 earnings ratio of 19.3 times and a price/book ratio of 4.7 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 10.0% 10-year compound annual revenue growth forecast.

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.

Our through-the-cycle net interest margin forecast is 2.90%; it assumes a 10-year US Treasury yield of 4.5% and a federal-funds rate of 2.5%. 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.

Our consolidated asset management outlook is increasingly optimistic, with our forecasts now calling for a 10-year revenue CAGR of 7.6% in the business, up from a meager 2.7% previously. This reflects outstanding recent growth in fee-based managed investing solutions, which is clearly a management emphasis. We now expect 12.2% annual growth in fee-based assets under management, up from just 7.2% previously, after the firm has managed to increase uptake of that business over the past few years. Managed investing inflows grew an outstanding 53% annually during the second quarter. The mix-shift toward the more attractive Schwab Wealth Advisory business, rather than the high-margin but lower-revenue-yield Schwab Advisor Network business, props up total asset management revenue yield; we now forecast a 33-basis-point blended management fee in 2035, up from just 20 basis points at our prior update.

We could see further positive surprises here, with decent growth in alternative asset AUM and monetization of Schwab's distribution, or with decent monetization rates on third-party ETFs, which the firm announced as a priority during its investor day meeting. In 2025, the firm earned a significant 0.25% take rate on its Mutual Fund OneSource solution, for context, although ETFs tend to be much lower-fee vehicles (limiting monetization opportunities, which are capped by management fees).

Regarding trading, we expect normalizing trading volume to partially offset fee compression in commissions and payment for order flow, resulting in modest annual declines—roughly 1% to 2% per year—in trading revenue over the next decade.

The firm has kept a lid on expense growth over time, with noninterest expense growth surpassing revenue growth in just two of the past 10 years. Given the centrality of this approach to Schwab's strategy, we forecast similar outcomes in the decade to come. We expect the firm to generate just shy of 54% pretax operating margin by the end of the decade, significantly higher than its 48% high-water mark in 2025.

We believe that Charles 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 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. 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.

Schwab was founded to capitalize on a 1975 Securities and Exchange Commission rule change that deregulated brokerage commissions. Similar to what we’ve seen in the asset management industry after the conception of Vanguard, the Wall Street hegemony was reluctant to respond to discount brokerage competition, even as organic flows and market share slowly shifted toward platforms like Schwab, E*Trade, and TD Ameritrade that offered better service at lower prices than their New York counterparts. Unique among its discount brokerage competitive set, Schwab began to expand into financial-services adjacencies as it sought to meet more of its growing customer base’s needs, like centralizing mutual fund services on one distribution platform, paid for by fund managers, through its Mutual Fund Marketplace and successful Schwab OneSource offerings, which had $404 billion in average assets under management in 2025. It would later recognize and capitalize on strong growth in the RIA business, and following the acquisition of TD Ameritrade now boasts more than 40% share in that quickly growing segment.

Most importantly, the firm founded Charles Schwab Bank in 2003, allowing it to sweep idle customer cash onto its own balance sheet to facilitate lending and securities investments. This asset-heavy approach, a sharp contrast from the approach of asset-light discount brokerage peers like TD Ameritrade (acquired by Schwab in 2020) that preferred to sweep customer cash into third-party partner banks for a fraction of the return, tilted Schwab’s revenue mix toward net interest income and asset management. It also substantially reduced its dependence on trading commissions, allowing the firm to launch free equity and exchange-traded fund trading on its platform in 2019, sending shockwaves through the industry and allowing it to acquire TD Ameritrade at a compelling price. A striking 84% of Schwab’s 2025 revenue was derived from net interest income, interest paid on bank deposits, and asset management, against just 16% from its hallmark trading offering.

We believe that Schwab has a defensible cost advantage in its brokerage and bank businesses, which are now inextricably intertwined. Similar to other industries in financial services like payments and asset management, retail brokerage is a very scalable business, resulting in gradual consolidation around a small cadre of winners over time. Once the fixed costs are plowed into the development of a retail trading platform, incremental trading volume is exceedingly low-cost, allowing firms to scale very profitably. This is best seen through expense on client assets, analogous to an efficiency ratio for banks. Here, Schwab is extremely competitive, with its $11.9 trillion in client assets seeing the firm’s EOCA clock in at just 0.12% in 2025, more than double the efficiency of competitors with smaller asset bases like wide-moat Bank of America (0.41%) and wide-moat Morgan Stanley (0.33%).

That metric has declined consistently from 0.17% a decade ago, and it looks to fall even further as the TD Ameritrade integration has already been worked into Schwab. A business model that naturally grows more profitable as it gets larger discourages new look-alike competition. It is no coincidence, in our view, that Schwab’s current retail brokerage competitors have been forced to specialize, pursue underpenetrated markets, or rely more heavily on marketing and incentives to attract customers. The durability of this advantage hangs on a firm’s ability to continue to attract new assets, but with Schwab’s 5%-6% average annual organic net asset growth over the past decade (adjusted for TD Ameritrade) positioning it as one of the premier asset gatherers in investment management, we do not harbor fears on this front.

Regarding Schwab Bank, our moat framework awards cost advantages for banks that boast some combination of a cost-advantaged deposit base, superior underwriting, and strong operating efficiency. Based on FDIC filings, we believe that Schwab benefits from all three features, although its lack of physical branches and limited need to compete for customer deposits, which are swept from the retail brokerage, make superior operating efficiency the most important.

Schwab has enjoyed an average deposit cost of funding of just 0.38% over the past decade, with an average deposit beta of roughly 0.30. Even in a higher-rate environment, the firm paid just a 0.50% yield on its interest-bearing deposit base, comfortably below an average of more than 2.25% across our US banking coverage in 2025 (estimated). That’s driven by two factors: customers’ desire to maintain readily accessible transactional cash, and the migration of more yield-sensitive cash toward Schwab’s money market fund products. While the latter feature means that deposit costs alone overstate Charles Schwab Bank's funding cost advantage, it's clear that the firm's all-in cost of funding is very competitive, allowing the firm to generate bank-like net interest margins despite a much safer balance sheet that skews toward high-quality securities holdings and low-risk, securitized lending.

Schwab has historically been very conservative in its underwriting, with margin lending rates roughly twice those of its peers and all its lending secured by customer assets, whether homes (mortgages, home equity lines of credit) or financial assets held with Schwab. Over-securitization is a wonderful prophylactic with respect to underwriting. As far back as Charles Schwab Bank's data goes with the FDIC, the firm has an average annual net charge-off ratio of 0.05%, compared with 0.84% for all FDIC-insured institutions over that period. Its ability to securitize its lending against customers’ asset portfolios results in de minimis loan losses and allows the firm to provide loans to its customers at superior rates, tiered based on the assets they hold with the firm. For example, customers would receive a 100-basis-point interest rate break if they hold $10 million or more in qualifying assets with Schwab, a 75-basis-point discount for $5 million-$10 million in assets, 50 basis points for $1 million-$5 million in assets, and 25 basis points for $250,000-$1 million. The underwriting benefits of this approach are obvious, and the asset consolidation incentives should not be overlooked. While a disciplined underwriting culture appears to be an advantage for Schwab, it is a subsidiary one, given the firm’s relatively small lending franchise.

Most important, in our view, is the operating efficiency of Charles Schwab Bank, which stands head and shoulders above peers of similar size as the firm’s unique structure allows it to forgo a costly branch network and spend less to acquire customers, who principally interact with the retail brokerage. 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.

We view competitive displacement as exceedingly unlikely for Schwab, underpinning our wide moat rating. The closest look-alike competitor is privately held Fidelity, which is slightly larger, with $18 trillion in assets under custody as of year-end 2025; much of that sits in retirement accounts, a business in which the firm boasts roughly 8 times the customer base of both Schwab and Vanguard. While competition has been fierce over the years, it has remained largely rational, and Fidelity’s customer base seems to be less trade-focused, with significantly lower turnover. Schwab’s relative strengths include first-party ETFs, its RIA custody business, and retail brokerage, where its customers tend to be more active. Fidelity is much stronger in its retirement and health savings account businesses and its first-party mutual fund products. We see little reason for a dramatic departure from historical competitive dynamics between those two and plenty of incentive to maintain the status quo, which has served both well. As Schwab operates at a structural cost advantage relative to its other retail brokerage competitors, and as it looks unlikely to meaningfully encroach on the ultra-high-net-worth sandbox where family offices and wirehouse firms like Bank of America and Morgan Stanley predominantly play, we don’t see any particular risk of displacement from that corner, either.

Schwab could drive strong organic asset growth with expansion into alternative investments, expansion of lending products, and 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.

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 structurally higher deposit costs, tied to artificial intelligence-enabled cash management tools, could hurt Schwab's net interest income generation capacity.