We recently compiled a list of the 9 Best Financial Services Stocks To Buy Now. In this article, we are going to take a look at where The Charles Schwab Corporation (NYSE:SCHW) stands against the other financial services stocks.
Although there was significant turbulence in the financial markets in August, the state of global financing is still stable. Despite considerable falls in the equities and corporate debt markets, financing conditions have not tightened significantly, suggesting borrowing resilience.
However, following an almost 10% drop, the broad US stock market is still 5% below its peak in July. Similar declines have been seen in European stocks, although there has been some recovery in these markets; the 500 large companies market is up 3% from its August low.
The markets for corporate bonds have also been impacted. Higher-rated corporate bonds saw an increase in risk premiums, but not to the point where it materially affected borrowing conditions. The current market volatility, according to Chris Jeffrey of Legal & General Investment Management, hasn’t affected corporate or household finance conditions significantly. This perspective is supported by the financial conditions index of a major global financial institution, which indicates that while circumstances have tightened since mid-July, they are still historically loose and more accommodating than they were for a large portion of the prior year.
Amidst the financial turbulence, the financial services industry has faced challenges, but it also showed resilience. The long-term outlook for the industry remains positive. As we have mentioned in our article, “25 Biggest Financial Firms in the World,” the financial services industry is expected to rise at a CAGR of 7.7% over the next few years, from $31138.82 billion in 2023 to $33539.52 billion in 2024. In 2023, Western Europe accounted for the largest portion of the financial services market, with North America coming in second. Financial services are transforming as a result of generative AI, which presents chances for creativity and efficiency.
The McKinsey Global Institute (MGI) claims that banks are racing to implement Gen AI and that its full potential can be realized with the correct operational model in place. According to MGI, the use of Gen AI in the global banking market has the potential to generate value of $200 billion to $340 billion per year, or 2.8 to 4.7 percent of industry revenues, primarily through increased productivity. A new study by MGI examined the usage of Gen AI by 16 of the largest financial institutions in the US and Europe, which together manage assets worth close to $26 trillion. According to the study, more than half of the organizations examined have embraced a more centrally driven structure for next-generation AI, even if their current data and analytics architecture is relatively decentralized. Moreover, artificial intelligence, according to EY, is changing financial markets by improving risk management and enhancing customer experience due to its wide range of uses.
The RSM US’s Financial Services Industry Outlook 2024, also notes that the financial services market is quickly evolving, with a focus on responsible AI in insurance. Similar actions are being taken by states as well. For instance, insurance companies are required by the California Consumer Privacy Act to explain how AI is used in pricing and coverage decisions; violation carries hefty fines. Secondly, the number of retail-friendly investment products is also increasing. Retail investors are the focus of growing interest from asset managers, exchanges, and broker-dealers. Finally, the real exposure of financial institutions to CRE maturities is another trend in the financial services industry. Hence, financial institutions analyzing CRE-related risk should conduct a thorough credit risk evaluation.
Methodology:
We sifted through holdings of financial services ETFs and financial media to form an initial list of 20 financial services stocks. Then we selected the 9 stocks that had the highest upside potential. The stocks are ranked in ascending order of the upside potential.
Some big shots in the financial services industry have been left out owing to our methodology since they had negative consensus upside.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here)
A corporate finance professional studying a financial performance chart.
The Charles Schwab Corporation (NYSE:SCHW)
Analysts’ Upside Potential: 15.19%
The Charles Schwab Corporation (NYSE:SCHW), a savings and loan holding company, was established in 1986 and offers a range of services, including banking, asset management, wealth management, custody, and financial advising. Investor Services and Advisor Services are its two main business segments.
Charles Schwab became the biggest retail broker in the US by client assets after acquiring TD Ameritrade, which strengthened its offerings for individual investors and improved trading. As of the end of July, Schwab’s total customer assets stood at $9.57 trillion, a growth driven by the increase in new assets. This translates to a 2% monthly rise and a 16% annual increase. Among the monthly accomplishments were 327,000 new brokerage accounts and $29 billion in core net new assets.
Despite mixed earnings dropping the stock price by 5%, the company maintained profitability, increased net margins, and achieved good core net new asset growth in the second quarter of 2024. It is in a favorable position to boost its market share in the quickly expanding direct and registered investment advisor categories because of its affordable and extensive offers combined with an exceptional service culture.
A profit recovery is anticipated in the second half of fiscal year 2024, notwithstanding short-term challenges to revenue and profit brought on by clients moving assets to higher-yielding options. This view is predicated on the expectation of net interest income stabilization and substantial cost reductions from Ameritrade’s integration.
Furthermore, with the normalization of cash sorting activities and the predicted expansion of net interest margin by fiscal year 2025, higher interest rates are likely to move from a headwind to a tailwind for the company, supporting the Buy rating and a target price of $82 by the DBS analyst Ken Shih. The analyst downgraded the price objective for Charles Schwab from $85.00 to $82.00 while keeping a Buy rating.
The Charles Schwab Corporation (NYSE:SCHW)’s strong market position and development potential have led analysts to award the company a Buy recommendation. There are 14 analysts who have collectively rated the stock as a “buy.” The average price objective indicates a possible gain of 15.19% from the current stock price of $65.36.
Overall SCHW ranks 3rd on our list of the best financial services stocks to buy. While we acknowledge the potential of SCHW as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than SCHW but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.