Why Charles Schwab Stock Underperformed in 2024

Charles Schwab (NYSE: SCHW) the stock has been a mixed performer this year, rising about 11% year-to-date, compared to the S&P 500, which is up over 25% over the same period. In comparison, Morgan Stanley, which owns rival E-trading, increases by approx. 35%. So what are some of the factors that have affected Schwab stock over the past year, and what lies ahead? See separately see BP shares down 14% this year, what’s next?

Charles Schwab’s banking segment has been showing headwinds lately. While the business benefited from the low-interest rate era, the Fed’s monetary tightening since 2022 prompted customers to shift their deposits in low-interest accounts toward higher-yielding assets. This trend, also known as cash sorting, has been the biggest problem for Schwab lately. Unlike traditional banks, which primarily lend these funds to retail and corporate customers via loans, Schwab invests much of its cash in long-term assets such as government bonds and mortgage-backed securities. The rising interest rates effectively eroded the value of these assets and squeezed the company’s net interest margins and profitability.

However, the company’s asset management has performed well. During Q3 2024, the most recently reported quarter, Charles Schwab’s earnings rose 5% year-over-year to $4.85 billion, led by the company’s wealth management business. The company saw its client assets rise to $9.92 trillion over the past quarter, led by higher market valuations as well as continued asset inflows. In addition, Schwab’s acquisition of TD Ameritrade, which closed in 2020, saw its integration largely completed earlier this year, and this has also benefited the asset management business. Total asset management and management fees derived from managing mutual funds and ETFs are up nearly 21%.

The rise in SCHW stock over the past 4-year period has been far from consistent, with annual returns significantly more volatile than the S&P 500. The stock returned 60% in 2021, 0% in 2022 and -16% in 2023. On the other hand, Trefis High quality portfoliowith a collection of 30 stocks, is significantly less volatile. And it has outperformed the S&P 500 every year in the same period. Why is that? As a group, HQ Portfolio shares outperformed the benchmark index with less risk; less of a roller coaster ride as it turns out HQ Portfolio performance metrics. So is SCHW stock a buy at current levels?

We are neutral on SCHW shares. Our forecast suggests so Charles Schwab’s valuation is $78 per share, which is approximately 4% above the current market price of around $75. While the company’s asset management-related business may continue to benefit from higher investor engagement and equity market strength following the US election, the Fed’s indications that fewer rate cuts may be on the way next year could be a net negative for the stock.

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