Charles Schwab just delivered one of its strongest quarters on record, and the stock still dropped. That disconnect caught Morgan Stanley’s attention, prompting the firm to double down on its bullish stance.
Schwab reported second-quarter adjusted earnings of $1.62 per share on record revenue of $7.07 billion, beating Wall Street estimates on both fronts.
The company also raised its full-year revenue growth outlook to between 17.5% and 18.5%, up from the 14% to 15% range projected at its May investor day.
Despite those results, shares slipped roughly 2.5%, and Morgan Stanley’s report stated that the selloff was a positioning issue, not a fundamental one.
Schwab’s earnings beat came from trading and lending, not interest rates
Morgan Stanley emphasized that the guidance increase was not driven by more favorable net interest margin assumptions, which remained unchanged from May at 3.00% to 3.10% for the full year.
Instead, the revenue uplift came from stronger-than-expected client engagement and transaction activity, according to the Morgan Stanley July 22 note.
Rick Wurster, CEO of Charles Schwab, attributed rising trading activity to generational and technological shifts.
During the second quarter, strong client engagement helped drive year-over-year revenue growth…Young investors, AI, all of that is leading towards a more sustained period of high levels of trading from our perspective
That distinction matters because Schwab’s stock has long traded as a bet on interest rates and the direction of cash sorting on its balance sheet.
Through the report, the second-quarter results provide evidence that the earnings algorithm is broadening and becoming less dependent on any single macro variable.
Daily average trades hit a record 11.9 million during the quarter, a 57% jump from the same period a year earlier, according to the company’s earnings release.
Trading revenue climbed 28% year over year to about $1.2 billion, while bank loan balances reached $67 billion, up 33% from a year ago.
Schwab’s lending push is reshaping its balance sheet economics
One of the sharpest observations in the Morgan Stanley note centers on how Schwab is deploying its balance sheet.
Rather than funneling all available capacity into securities, the company is directing cash flow toward pledged asset lines and other client loans, which carry spreads more than 100 basis points above what the firm would earn from buying bonds, according to Schwab’s Q2 2026 earnings release.
Pledged asset line balances surged to $33.4 billion, representing a 59% increase from a year ago, while originations were up about 60%, Schwab’s Q2 2026 earnings release reported.
Wurster pointed to the product’s appeal for clients with large unrealized gains who want liquidity without triggering a taxable event.
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“They’re seeing their wealth grow, and they might want to buy a house, put their kid through college, whatever it may be,” Wurster said on the earnings call, according to a transcript published by Benzinga.
“They don’t want to sell the position given the gains that they have. And so they want to leverage that position, and that pledged asset line is a great way to do it,” he added.
The report framed this as a durable shift away from passive, rate-sensitive income toward revenue that is tied to client relationships.
Lending balances currently represent about 0.5% of total client assets at Schwab, compared with roughly 4% across the broader industry, suggesting significant room to grow, according to the research note.
Schwab is expanding high-margin client lending, boosting profitability while creating new growth opportunities beyond traditional bond investments and interest income.
Schwab bets on prediction markets, crypto, and AI to diversify revenue
Beyond lending, Schwab is building out several new revenue lines that Morgan Stanley sees as meaningful growth drivers.
The company confirmed it is working with Cboe Global Markets on binary options tied to financial and economic events, though no launch date has been set.
Management made clear it will avoid sports, entertainment, and celebrity-related contracts, which Schwab management estimates account for 90% to 95% of current prediction-market volume.
On crypto, Schwab launched direct spot trading for Bitcoin and Ether through its new Schwab Crypto service and expects to begin piloting transfer functionality by the end of July.
Enabling clients to move externally held digital assets onto the platform could strengthen asset consolidation over time.
Schwab also rolled out Portfolio Insights, a generative artificial intelligence (AI) tool for analyzing performance, and began piloting Schwab Assistant internally in July.
Wurster told analysts that AI-driven research is already contributing to elevated trading activity, particularly among younger investors.
Morgan Stanley sees a re-rating opportunity as Schwab’s earnings mix shifts
The Morgan Stanley report set his $133 price target based on a 16 times multiple of Morgan Stanley’s estimated 2027 earnings per share of $8.32. That implies roughly 30% upside from where the stock was trading ahead of earnings near $102.54.
The broader argument is that the market still treats Schwab primarily as a balance-sheet recovery story, focused on how quickly its underwater securities portfolio reprices to higher yields.
Morgan Stanley contends investors should instead look at the multiple revenue engines now taking shape, from trading and lending to advice, asset management, and digital assets.
Schwab’s post-earnings dip may look like a red flag on the surface, but the underlying results point to a company whose earnings profile is growing more diversified and less tethered to any single macro variable.
The question for investors is whether the market will start pricing in that shift, or keep treating Schwab like the rate-driven name it used to be.
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