Charles Schwab (NYSE: SCHW) shares have experienced mixed results this year. The stock is up about 11% year-to-date, while the S&P 500 has surged over 25%. Additionally, Morgan Stanley, which owns rival E-trade, has seen an impressive 35% increase. Let’s explore the factors affecting Schwab’s performance in the past year and what the future may hold.
Challenges from the Banking Segment
Recently, Schwab’s banking operations have faced challenges. The low-interest rates of previous years helped the business grow, but the Fed’s tightening since 2022 has prompted customers to transfer their deposits from low-yield accounts to higher-yield investments. This trend, known as cash sorting, has significantly impacted Schwab. Unlike traditional banks that lend deposits directly, Schwab primarily invests in long-term assets like Treasuries and mortgage-backed securities. Rising interest rates have diminished the value of these assets, thereby squeezing the company’s net interest margins and, ultimately, its profitability.
Asset Management Performance
On a brighter note, Schwab’s asset management division has shown strong results. In the third quarter of 2024, Charles Schwab’s revenues increased by 5% year-over-year to $4.85 billion, largely driven by its asset management business. The company reported client assets reaching $9.92 trillion, aided by higher market valuations and continued asset inflows. Notably, the integration of TD Ameritrade, completed in 2020, wrapped up earlier this year, positively impacting the asset management sector. Schwab also saw substantial growth in overall asset management and administration fees, up nearly 21%.
Stock Performance Overview
The journey of SCHW stock over the past four years has been inconsistent, with returns much more volatile compared to the S&P 500. The stock saw returns of 60% in 2021, remained flat in 2022, and dropped by 16% in 2023. Conversely, the Trefis High Quality (HQ) Portfolio, comprising 30 selected stocks, consistently outperformed the S&P 500 annually during this timeframe. This portfolio generally offers better returns with less risk, making it a steadier choice for investors.
Future Outlook for Schwab Stock
Is SCHW stock a good investment now? We maintain a neutral stance on the stock. Our valuation analysis suggests that Charles Schwab’s valuation is $78 per share, which is about 4% higher than the current market price of around $75. The company’s asset management business may continue to benefit from heightened investor interest and market strength following the U.S. election. However, signals from the Fed indicating fewer rate cuts for next year could pose challenges for the stock’s performance.
| Returns | Dec 2024 MTD [1] |
2024 YTD [1] |
2017-24 Total [2] |
| SCHW Return | -9% | 11% | 91% |
| S&P 500 Return | 0% | 27% | 170% |
| Trefis Reinforced Value Portfolio | -3% | 19% | 707% |
[1] Returns as of 12/30/2024
[2] Cumulative total returns since the end of 2016
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
