Charles Schwab Q3 Earnings Preview: Improving Economy Bodes Well For SCHW Stock

Charles Schwab (SCHW) offers up its assessment of the third quarter early next week and expectations are that it should have at least in-line quarterly earnings thanks to an economy that continues to stabilize and interest rates that should go higher.

Brokerage and financial companies have had a strong showing so far this year, with trading volume picking up during the summer months. That has led to surges in their share prices, with Charles Schwab stock up 15% since the middle of September.

With tax reform potentially in the works, lots of Wall Street watchers are bullish on the brokerage sector and their earnings results. Take JMP Securities analyst Devin Ryan, who said in a recent research report that Charles Schwab should have a quarter that while it doesn’t surprise, meets expectations. The analyst thinks the same of rival TD Ameritrade and predicts competitor E*Trade will surprise on the upside. While some are hoping for upside out of Schwab, inline is better than disappointing for the three month period ended in September.

“We think the three main themes supporting this have been: a recovery in interest rate expectations into quarter-end; higher asset prices, which are directly supporting financial stock appreciation and also have positive implications on a number of business lines; and an improvement in the perceived probability for tax reform,” wrote Ryan in a note to clients. “On the other hand, while we think the stocks are generally pricing in the current interest rate curve and asset prices, we believe interest rate and asset price views could still improve if positive economic momentum continues, and tax reform could represent a catalyst for that.”  

For the third quarter, Wall Street is looking for earnings of $0.41 a share and revenue of $2.19 billion out of Schwab. That is higher than the earnings of $0.39 a share and revenue of $2.13 billion the company reported for the second quarter. In the year-ago second quarter, the San Francisco discount broker posted earnings of $0.30 a share and revenue of $1.8 billion. The company's earnings report is slated for Oct. 16.

When it comes to tax reform a lot of the attention has been focused on companies with tons of cash held overseas, but it can also benefit Charles Schwab if President Donald Trump is able to lower the corporate tax rate and simplify the tax code. Charles Schwab has little business outside the U.S which means that if tax reform does get passed and the corporate tax rate is reduced, Schwab stands to benefit the most. On top of that, because it doesn’t have big exposure overseas, it won’t suffer as much as rivals from a weakening U.S. dollar. If the U.S. dollar stays weak next year it could increase interest in stocks like Schwab. As for interest rates, an environment where rates are rising bodes well for brokerage firms, which are able to earn more interest income from uninvested cash in their customers' accounts. Investment activity also tends to pick up when rates are on the rise. Then there’s trading volume. What Schwab has to say on that front could make or break the stock next week. Same goes for its guidance for the last three months of the year.