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Thursday is going to be an important day for Charles Schwab (NYSE:SCHW) investors like myself. The storied brokerage will unveil its third-quarter results before market open; we'll be hoping for double-digit growth figures similar to those it posted in recent quarters.
A stock's post-earnings surge or slump is seldom only about how its revenue and profitability compare to analyst expectations. While this matters, a company the size of Schwab is complex and made up of numerous pieces. Given that, I think there are several important aspects of its business poised to outperform, which would give this stock some real zip.
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According to data compiled by The Wall Street Journal, 19 of the 26 analysts tracking the stock rate it as either a buy or overweight (a sort of watered-down buy). Six have flagged it as a hold, while only one believes it deserves an underweight.
With such a strong bullish presence, it shouldn't be a surprise that those prognosticators expect another quarter of impressive growth. Their consensus estimate for revenue, turning to Yahoo! Finance data, is just under $7.2 billion, which is 17% higher than the tally for the third quarter of 2025. As for profitability, adjusted net income is anticipated to rise 27% to $1.66 per share.
To tease out why those growth projections are so lofty, we should take a look at some of the most critical elements of Schwab's business.
To many, Schwab is a brokerage that appears to make buckets of money the classic way -- by facilitating securities trading.
But trading revenue is volatile because securities markets are volatile. Plus, next-generation competitors started cutting their trading fees years ago, resulting in a race to the bottom. These days, many brokerages don't charge individual investors any fees at all for the classic stock trading they're still identified with; Schwab is one of those companies (although it still earns revenue for other types of trading).
Instead, Schwab functions more like a bank, relying heavily on net interest income (NII) -- the difference between the interest it pays on customer deposits and the interest it earns by investing those funds.
This is a fine business, as it's more predictable. Plus, it's hard to lose money when playing the spread between low customer payouts and the interest from even the most conservative investments. In Schwab's second quarter, NII zoomed 19% higher year over year to nearly $3.4 billion, accounting for 47% of overall revenue and making it far and away the No. 1 contributor to the total.
The runner-up revenue streams are, respectively, asset management and administration fees (for services such as wealth management) and trading revenue. These brought in over $1.8 billion (26% of total revenue) and more than $1.2 billion (17%) in the quarter, respectively.
All three of these activities are sure to benefit from the Federal Reserve's (Fed) 25-basis-point hike to its key target interest rate on Sept. 16 (although the impact will be minimal in the third quarter considering that it ended on Sept. 30). Higher rates goose NII because the spread tends to widen between interest earned and paid. They also benefit asset management activities since clients are often eager to shift into higher-yielding investments; this can also light a fire under securities trading for the same reason.
By my count, eight of those analysts have adjusted their Schwab takes so far this month. I'd imagine that the Fed's move played at least some part in this.
Interestingly, this was a 4-4 tie between those raising their price targets and those lowering them.
This might reflect the fact that rates are a double-edged sword. In Schwab's case, higher rates could make clients uncomfortable with the pennies they are being paid to keep their money stashed in "cash sweep" regimes. This would compel them to seek higher-yielding situations elsewhere.
Another potential headache is "cash sorting," with customers hunting for higher-yielding opportunities within Schwab's large selection of investable assets. In that case, the company is forced to replace those low-cost deposits with higher-cost supplemental funding, like certificates of deposit (CDs). This increases interest expense.
Yet I think that the majority of a brokerage's customer base doesn't restlessly move cash around for higher yield. If anything, individual clients prefer to have their funds parked securely with a well-known financial services provider like Schwab until they pull the lever on an investment. Also, one of the company's strengths is attracting fresh business, not repelling it -- in the second quarter, for example, it added 1.4 million new accounts, a robust 27% increase.
So ultimately, in this environment of rising interest rates and frothy securities markets, I feel that Schwab has a high chance of doing better than many expect in its third quarter. I'm keeping its shares in my portfolio.
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Charles Schwab is an advertising partner of Motley Fool Money. Eric Volkman has positions in Charles Schwab. The Motley Fool recommends Charles Schwab and recommends the following options: short September 2026 $95 calls on Charles Schwab. The Motley Fool has a disclosure policy.
Charles Schwab's Next Earnings Report on Oct. 15 2026 Could Send the Stock Soaring. Here's Why. was originally published by The Motley Fool
