Charles Schwab and BlackRock Are JPMorgan's Top Stock Picks in Financials

December 4, 2017 — 11:30 AM EST

With tax reform likely to pass and interest rates likely to move higher, JPMorgan Chase is optimistic about financial stocks in 2018, naming The Charles Schwab Corporation (SCHW) and BlackRock, Inc. (BLK) as top picks.

In a research report late last week, JPMorgan said that financial stocks should continue to move higher in the New Year, despite a surge in trading in 2017. A lot of that optimism also has to do with a regulatory environment that is expected to be much friendlier under President Donald Trump. "We expect large bank stocks in 2018 to continue to be driven by changes in regulations and taxes," JPMorgan analysts wrote in the report, which was covered by CNBC. "We see investor sentiment on regional bank stocks improving in the year ahead, particularly with tax reform now making progress (and regional banks as beneficiaries) and new leadership at key regulatory agencies taking a much more friendly approach with banks."

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JPMorgan analyst Kenneth Worthington said he expects San Francisco-based discount broker Charles Schwab to benefit from higher interest rates in 2018 and swelling bank assets. The analyst has a $52 price target on Schwab stock. With shares recently trading at $50.74, up $1.24 or 2.51%, the analysts sees 4% upside potential. For the year, shares of Schwab are trading up more than 20%. "We see potential for SCHW shares to perform well around the higher interest rate outlook and growing bank assets. We expect Schwab bank asset growth to increase substantially with faster and larger transfers from money market fund assets to bank assets," wrote Worthington.

But JPMorgan is not the only firm that is bullish about Charles Schwab's prospects. Citing the discount brokerage's focus on the client, along with rising interest rates and more money going into its proprietary bank, Credit Suisse recently initiated coverage on Charles Schwab stock with an Outperform rating and a $55 price target. Credit Suisse analyst Craig Siegenthaler said that Schwab's client-centric business strategy should enable it to generate "significant" value for its investors.

As for BlackRock, JPMorgan's Worthington has a $558 price target on the stock, implying that shares can gain more than 9%. The analyst pointed to BlackRock's business overseas as a reason to be upbeat about the stock in 2018. "BlackRock generates significant income from abroad, and we see the company benefiting from higher fee rates and margins, driven by better non-U.S. equity market returns, as non-U.S. operations are typically higher fee and higher margin. Higher international earnings should also lower taxes," wrote the analyst. Worthington also noted that BlackRock has "robust organic growth" driven in part by its iShares exchange-traded funds and Aladdin, the firm's investment analysis technology system.