Charles Schwab (NYSE: SCHW) stock has been a mixed performer this year, rising by about 11% year-to-date, versus the S&P 500 which has gained over 25% over the same period. In comparison Morgan Stanley, which owns rival E-trade, remains up by roughly 35%. So what are some of the factors that have impacted Schwab stock over the past year and what lies ahead?
Charles Schwab’s banking segment has proved a headwind of late. While the business benefited through the low-interest rate era, the Fed’s monetary tightening since 2022 made customers move their deposits in low-yielding sweep accounts toward higher-yielding assets. This trend, also known as cash sorting, has been the biggest issue for Schwab of late. Unlike traditional banks, which primarily lend these funds to retail and commercial customers via loans, Schwab invests much of its cash in long-term assets such as Treasuries and mortgage-backed securities. The rising interest rates effectively eroded the value of these assets, squeezing the company’s net interest margins and profitability.
However, the company’s asset management business has been faring well. Over Q3 2024, the most recently reported quarter, Charles Schwab’s revenues rose 5% year-over-year to $4.85 billion, led by its asset management business. The company saw its client assets rise to $9.92 trillion over the last quarter, led by higher market valuations as well as continued asset inflows. Moreover, Schwab’s acquisition of TD Ameritrade, which was closed in 2020, saw its integration largely wind up earlier this year and this has also benefited the asset management business. Overall asset management and administration fees, which are derived from managing mutual funds and ETFs, have surged by nearly 21%.
The increase in SCHW stock over the last 4-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 60% in 2021, 0% in 2022, and -16% in 2023. In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. So is SCHW stock a buy at current levels?
We remain neutral on SCHW stock. Our forecast indicates that Charles Schwab’s valuation is $78 per share, which is roughly 4% above the current market price of around $75. While the company’s asset management-related business could continue to benefit from higher investor engagement and strength in the stock market following the U.S. election, the Fed’s indications that fewer rate cuts may be on the cards for next year could be a net negative for the stock.
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