By Jacob Sonenshine

Charles Schwab's stock has recovered much of its loss from its "cash sweep" issue. Shares could reach a new record high soon.

Nearly a year ago, that idea might have seemed laughable. In July 2024, Schwab was the target of a class-action lawsuit that claimed the firm's cash-sweep program offered ultralow yields that kept the company's costs down but underpaid investors. Suddenly, customers were moving billions of dollars out of those programs and into some of Schwab's higher-yielding money-market funds -- or to its competitors, including Vanguard and Fidelity.

Without this cheap source of funds, Schwab's costs rose and earnings fell. Its stock dropped 17% in about a week in July 2024, marking the start of a period of intense turmoil. At $61, its low hit last August, shares were down 36% from their record high of $95.53, hit in early 2022.

But something has happened since then -- Schwab stock has quietly rebounded. Driving it back upward has been this year's earnings-per-share estimate, which jumped to $4.31 from a low of $3.82 in October. To do so, Schwab focused on paying down debt, lowering its interest expense in the first quarter down to $1.05 billion from $1.7 billion in last year's second quarter, and on increasing its profitability -- net interest margins, the percentage of interest revenue Schwab keeps as profit, has steadily climbed. At $88.40, shares are just 7.4% below their all-time high.

It's enough to make one Schwab bear less bearish. In upgrading the stock to Neutral from Sell this past week, Redburn Atlantic analyst Charles Bendit noted that ehe cash-sweep and interest cost problems are finally dissipating. "After more than two years of dealing with the cash sorting issues (accompanied by persistently negative earnings revisions), there are signs that pressure on cash sweep is alleviating, allowing for the pay-down of high-cost funding," he writes.

Bendit isn't bullish -- his $82 price target suggests a 7.2% decline in the stock -- but there's reason to think his target may be conservative. The dynamic of a headwind turning into a tailwind is common to recovery stories, and Schwab is now essentially a growth story.

Analysts forecast annual sales growth of 8% through 2030. While Schwab's brokerage and wealth-management businesses are expected to grow more moderately, its net interest income should grow by 9% annually and reach $17.3 billion by 2030. It should also get a boost from making more margin loans to traders, while its "net new assets," which have recently accelerated -- reaching $130 billion in the first quarter after dropping by $75 billion in last year's second quarter -- should continue to grow. Combined, these factors can drive earnings up 17% annually, to just over $9 per share by 2030.

The stock, at 18.9 times 12-month forward earnings, trades in line with its five-year average but below its recent peak of 22 times, reached in November, and the 24.6 peak before the cash-sweep issues began in 2022. That leaves plenty room for expansion, which could provide even more room for upside in the months ahead.

It's fair to say that Schwab is back.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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June 12, 2025 11:44 ET (15:44 GMT)

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