The market is too pessimistic about next year's earnings. More expensive borrowing limits lending profits, but recurring advice fees and portfolio reinvestment support my unchanged $114.60 twelve-month target.
Key points
- $5.75 a share of 2027 earnings supports today's price at my assumed multiple.
- $30.75 billion of forecast 2027 revenue allows for higher funding costs.
- $114.60 a share remains my twelve-month target and supports Buy.
The call
The market is too pessimistic. At my assumed earnings multiple, today's price requires roughly flat revenue in 2027 under my expense assumptions. Investors are questioning whether growing loans create enough profit when customer deposits cannot fund all the growth.
Cheap deposits still anchor funding ($ billions)- Average funding ($ billions)
- Annualized cost (%)
Schwab October 15, 2026 release; Q3 average balances and annualized funding rates.
Cheap funding remains a substantial advantage, despite expensive borrowing at the margin. My 2027 forecast combines modestly wider lending spreads with growing advice fees, not renewed trading acceleration. January's business update should test that forecast. Persistent underperformance against the market argues against expecting a higher valuation multiple.
Valuation
| Driver | My estimate |
|---|
| 2027 net revenue | $30.75 billion |
| 2027 GAAP pretax profit margin | 54.0% |
| 2027 GAAP earnings per share | $7.16 |
| Base earnings multiple | 14 times |
| Trusted custody franchise premium | 2 times |
| Twelve-month target, rounded | $114.60 a share |
Revenue includes $15.22 billion of net interest income and $8.36 billion of asset-management fees in 2027. Earnings deduct $14.15 billion of operating expenses, a 23.5% tax rate and $380 million of preferred dividends, using 1.72 billion diluted shares. The franchise premium rewards durable client relationships; persistent adviser departures would remove it.
How next year's lending spread changes the targetOwn scenarios, October 16, 2026; $480B earning assets, fixed expenses and 16 times 2027 earnings.
The target uses unrounded earnings, rounded to the nearest ten cents. A recession case produces about $84 a share, making the potential gain larger than that modeled loss, though not limiting the downside.
Risks
- Funding deteriorates: watch bank deposits and borrowing costs, rather than total client cash, which includes balances supporting specialized trading strategies.
- Markets weaken: watch managed assets and revenue per trade; stronger activity across competing brokers is not proof of lasting market-share gains.
- Capital limits growth: watch lending requirements and repurchases; subsidiary cash cannot automatically fund shareholder payouts, and my forecast retains acquisition-related amortization.
What would change my mind
Two consecutive quarters with net interest margin, the annualized lending spread after funding costs, below 3.0% despite continued lending growth would undermine my forecast.