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.