Charles Schwab: The Rate Cut Trade Just Broke
Charles Schwab ($SCHW) is down ~14% YTD and essentially flat for the twelve months despite the underlying business delivering record revenue, earnings, and client asset growth in every quarter.
The market priced in interest rate cuts throughout 2025 and into 2026. Rate cuts hurt $SCHW, they compress the net interest margin that generates nearly half the company's revenue. As a result the market priced $SCHW as though rate cuts were coming thick and fast, but that's not the case.
On May 28th, the newly sworn-in Fed Chair Kevin Warsh, has made it clear publicly that rate cuts are off the table given current inflation levels and has left the door open to rate rises. The same day, Schwab's CEO spent $1.85M of his own money buying $SCHW shares in the open market.
What Schwab Does
$SCHW is the largest retail brokerage in America (includes Schwab.com, Schwab Mobile and thinkorswim) with $11.77T in client assets, 39.1M active brokerage accounts and 1.3M new accounts opened in Q1 2026 alone (+10% YoY). Investable wealth in the US is $85T, $SCHW cusodies $11.8T of it, the gap is the growth opportunity.
The business has three primary revenue streams. Net interest revenue: money earned on the spread between what Schwab pays clients on their cash and what it earns deploying that cash into securities and loans. Asset management fees: recurring revenue from Schwab's funds, ETFs, and managed investing offerings. Trading revenue: commissions and order flow from client trading activity.
Shown in the Q1 2026 10-Q filed May 8th, net interest revenue was $3.1B in Q1 (+16% YoY), asset management fees were $1.8B (+15% YoY) and trading revenue was $1.1B (+20% YoY). Total net revenues $6.5B (+16% YoY), net income $2.5B (+30% YoY), diluted EPS $1.37 (+38% YoY) and pre-tax profit margin 49.2% (+5.4% YoY).
These numbers show a business executing at peak efficiency whilst the stock price is reflecting maximum pessimism about its interest rate environment.
Rate Sensitivity Argument
This is the core of my thesis and the 10-Q details quantifies the impact on the bottom line. $SCHW's net interest revenue depends on the spread between what it earns on assets and what it pays on liabilities. When rates fall they earns less on the money it deploys while still paying similar rates on deposits. When rates rise the opposite happens, they earns more on its assets before deposit costs catch up, increasing profit.
The interest rate sensitivity model is clear, a 100 basis point parallel increase in rates across all maturities would add approximately $1.3-1.5B annually to net interest revenue. Q1 2026 net interest margin was 2.88% (+57bps vs. Q4 2024), the direction is already improving.
Warsh is now discussing rate rises, even 50 basis points of additional tightening adds $650-750M in annual net interest revenue on top of the $3.1B it's already generating per quarter. That's a meaningful earnings upgrade that isn't in guidance numbers yet.
The other rate dynamic worth touching on is cash sorting, when rates were high, clients moved cash out of $SCHW's low-yielding bank accounts into higher-yielding money market funds. That reduced the balances they could deploy to generate spread, the 10-Q shows client transactional sweep cash balances ended March at $461.5B (+$7.8B QoQ), the cash sorting trend is stabilising and beginning to reverse.
The Net Interest Margin (NIM) improvement connects both of these dynamics. As cash sorting reverses and client balances return to $SCHW's bank accounts, they deploy more cash at spread, earning more on each dollar. That directly expands the net interest margin from the current 2.88% toward the 3%+ level management is targeting. Every 10 basis points of NIM expansion on $437.7B in interest-earning assets adds approximately $437M in annual net interest revenue
The Insider Picture
On May 28th 2026 President and CEO Richard Wurster purchased 21,959 $SCHW shares in an open market transaction totalling $1,849,512, at a price between $84.04 - $84.51. This is a discretionary purchase, not RSUs, options or a pre-planned purchase programme.
$SCHW itself has been buying aggressively, in Q1 2026 alone they repurchased $2.4B of its own shares, totaling 24.3M shares. Full year 2025 buybacks totaled $7.3B and the dividend was raised 19% in Jan 2026 to $0.32 per quarter.
The founder (Charles Schwab) sold 246,100 shares in early May at $91-92 through a limited partnership, retaining over 80M shares across various trusts and entities. The sales are routine diversification from someone whose entire net worth is concentrated in one stock at age 86.
What I Haven't Seen Covered
The PDT rule elimination: For 25 years, the Pattern Day Trader rule required any retail investor who executed four or more day trades (buying and selling the same stock on the same day) in a five-business-day window to maintain $25,000 in their account at all times. Falling below that threshold means you couldn't day trade. On April 14th 2026 the SEC approved FINRA's amendments to eliminate the rule entirely, from June 8th $SCHW will stop counting day trades and will no longer restrict accounts that would previously have been flagged. Millions of small accounts with under $25,000 now get unrestricted trading access for the first time and more trades means more trading revenue. This rule change also arrives the same week as the SpaceX IPO retail allocation that Schwab is distributing to its 39.1 million account holders.
Crypto launch: $SCHW launched spot Bitcoin and Ethereum trading in May 2026 through its banking subsidiary, available across Schwab.com, Schwab Mobile, and thinkorswim at 0.75% per trade. Separately, thinkorswim now offers 24/7 futures trading on Bitcoin, Ethereum, Solana, and Ripple. The revenue from trading fees on 39.1M accounts is not yet in any analyst model or included in future guidance. A separate advisor-focused platform is targeted for mid-2027.
Forge Global and private markets: $SCHW completed the acquisition of Forge Global in March 2026, which provides eligible investors with direct and indirect access to pre-IPO company shares. The SpaceX IPO lists June 12th with 30% retail allocation distributed through Schwab, Robinhood, and Fidelity. This Forge integration puts it at the centre of the private markets access trend for retail investors and Registered Investment Advisors during a year we are due three mega-cap IPOs (SpaceX, OpenAI and Anthropic).
TD Bank overhang completely resolved: TD Bank held a 10.1% stake in Schwab as part of the original TD Ameritrade acquisition. Following TD's $3B money laundering fine and a US asset cap imposed by regulators in 2024, they sold their entire 184.7M share position in February 2025 to raise capital, depressing the Schwab share price throughout the process. The 10-Q confirms TD Bank has disposed of all its common shares with no remaining nonvoting stock outstanding. The overhang is now gone and new institutional buyers can now step in without being diluted by TD's ongoing sales.
AI portfolio tools: $SCHW launched an AI-powered tool aimed at helping investors understand portfolio performance and market activity. Barclays specifically notes management does not view AI-powered cash optimization tools as a business threat, with the concern initially being that AI helps clients find better yields elsewhere and accelerates cash sorting.
The Risks
Rate sensitivity cuts both ways, Warsh's actual position is more nuanced than simply hawkish. He has described AI as 'structurally disinflationary' and sees a path to lower rates if AI-driven productivity improvements reduce inflationary pressure over time. His current stance is not that rates must rise, but that inflation has to come down first before cuts are justified. If AI productivity gains materialise faster than expected and PCE falls toward 2.5-3% without a recession, Warsh could pivot toward cuts sooner than the current data implies,which would compress $SCHW's NIM tailwind.
Cash sorting is not fully resolved, client cash as a percentage of client assets fell from 10.6% to 9.9% QoQ. The floor is forming but it hasn't definitively formed, if clients continue migrating cash to higher-yielding alternatives the NIM improvement thesis is delayed.
Regulatory risk in this sector is constantly ongoing. As a savings and loan holding company with a significant banking subsidiary, Schwab faces Basel III capital requirements, FDIC oversight, and the evolving regulatory environment for broker-dealers.
During the cash sorting peak $SCHW borrowed heavily from external sources to fund its balance sheet, reaching over $160B at one point, in expensive wholesale borrowings. That borrowing has been paid down to just $5.1B today as deposits return, each dollar of expensive wholesale funding replaced by cheap client deposits directly improves the net interest margin. The $2.25B in new senior notes issued May 21st ($1B due 2030 at 4.744% and $1.25B due 2037 at 5.493%) adds a modest offset to that progress until maturity.
My View
The market spent 2025 and early 2026 pricing Charles Schwab for a rate cut environment that is now not materialising. The business delivered record revenue, earnings and client growth every quarter while the stock chopped sideways. Then the CEO spent $1.85M of his own money buying shares the same day the Fed chair discussed rate rises publicly.
At ~$87, SCHW trades at roughly 18x trailing earnings on a business growing EPS at 38% YoY with a 49.2% pre-tax margin, 40% return on tangible equity, and a direct earnings sensitivity of $1.3-1.5B annually per 100 basis points of rate movement.
This is a rate environment play with a clear window: the FOMC meets June 17-18th. If Warsh holds and maintains the language around potential rises, Schwab's NIM expansion continues and consensus earnings upgrades follow. The May CPI print on June 10th is the data point that sets the tone for the June 18th decision. If PCE stays elevated and Warsh stays hawkish, the narrative has further room to run. The risk is that the Iran conflict comes to an end, oil falls sharply and the Fed pivot quickly back towards cuts fast than the April PCE data warrants, at which point the thesis I've outlined ends.
Five key catalysts converge over the next eighteen days, the PDT rule elimination June 8th, the SpaceX IPO listing June 12th driving retail trading volume, the May CPI print June 10th, the FOMC decision June 18th, and NIM trajectory in Q2 earnings in July.
At 16.72x forward P/E, $SCHW trades at a meaningful discount to Interactive Brokers at 34.31x, despite $SCHW growing EPS at 38% YoY versus IBKR's 8.1% projected growth. $SCHW also trades 14% below its own 10-year historical average P/E of 23.34x. The business that benefits most directly from higher rates is priced at a discount to both its own history and its closest competitor, on earnings growing at more than four times the rate.
Q2 2026 earnings are expected around 17th July, with the exact date still to be confirmed. I'll be watching net interest margin trajectory from 2.88% in Q1, client cash as a percentage of client assets, and any update on the crypto trading launch timeline. If NIM expands toward 3%+ the re-rating follows immediately.
Ticker Thoughts is independent analysis. Current position: 230 shares at $87.28 average.