The Charles Schwab Corporation (SCHW – Free Report) is a $55 billion investment services firm with $2.73 trillion in client assets. The firm’s evolution from a discount broker to a full-service wealth management institution explains that enormous asset base.
Schwab looks poised for 26% EPS growth this year based on rising analysts earnings estimates. And the 15.6% revenue growth estimate fueling those projected profits is probably a big part of the reason shares are pushing highs not seen since the year 2000.
Wall Street analysts are forecasting that the broker to hit a record $8.66 billion on the top line this year. That math is driven by three factors: interest rates, deregulation, and the natural climb in trading accounts and volume in a strong bull market.
Financial Sector Takes Flight
The financial sector definitely got a face lift since the election for two obvious reasons. First, the yield curve steepened as long-term Treasuries sold off fast and furious.
And this rise in interest rates is generally good for banks and other financial institutions who benefit from a greater net interest margin on their borrowing and lending activities.
Second, there was the overwhelming sense that the new administration would do serious damage to financial regulations like Dodd-Frank, thus clearing the way for unencumbered dealings between investment banking and commercial banking, as well as the removal of other shackles.
Banks big and small have lead the charge for the most part for the two benefits mentioned.
Brokers Make Bank
But did you know that investment broker-dealers also benefit from rising yields? That’s because in addition to income from stock lending and margin interest, they hold lots of assets in customer cash balances that they can earn interest on every night.
For the brokers, it also helps that the strong bull market is making new all-time highs and driving more stock trading commissions and newly funded accounts.
For all these reasons, Wall Street earnings estimates have been rising for brokers like Schwab and TD Ameritrade (AMTD – Free Report) , as well as for investment banks like Goldman Sachs (GS – Free Report) and Morgan Stanley (MS – Free Report) . The industry group comprising all these names has climbed to #8 out of 265 industry groups.
The Economy and Inflation Expectations
The big underlying drivers for the big move in interest rates — the 10-year Treasury yield surged from 1.8% to 2.6% in just 5 weeks after the election — was a combination of the building economic momentum of the second half of 2016 with renewed optimism about the GOP sweep of the Presidency as well as regaining both houses of Congress.
After the election, it was as if the inflation genie had suddenly been released after years in captivity.
So the perception among financial elites is that all kinds of prices will continue rising from Wall Street to Main Street, thereby fueling inflation and the revenues and profits of financial intermediaries.
Value investor Mario Gabelli, founder and CEO of Gamco Investors, shared his top stock picks and market views in an exclusive interview with CNBC’s Scott Wapner on Tuesday January 10.
Specifically commenting on Goldman Sachs, he said “I don’t see any reason to not think it will do quite well over the next five years. The investment banks and commercial banks … fundamentals are terrific. The underpinnings are great.”
Gabelli believes the financial sector will continue to perform well in 2017 as economic growth improves, wages rise, and lending increases.
All of these factors create solid conditions for brokers going forward. Your game plan should be to buy solid Zacks Rank financial stocks on the dips.
Zacks’ best stocks under $10
As a Zacks Rank #1 Strong Buy, today’s Bull of the Day has a short-term 1 to 3-month profit zone. But the Zacks Rank system also leads to longer-term investments. Starting today, you can look inside our lowest-priced stocks with 2X and 3X profit potential plus other private portfolios. Simply click here >>