Schwab's Strong Quarter Stands Out as Most Companies Miss Targets

Charles Schwab Corp., a major discount brokerage, reported earnings in October 2024 that beat what Wall Street analysts expected. The stock price went up as a result. Bloomberg reported that the company had been paying down expensive debt it took on when it bought TD Ameritrade.

The strong result matters because it's become rare. Companies in the S&P 500 are beating earnings estimates at the lowest rate in nearly two years, according to Bloomberg. When most companies disappoint, the ones that deliver good news get outsized attention from investors.

How Debt Paydown Helped the Numbers

Schwab's beat tied directly to paying down expensive borrowings. The company had borrowed roughly $26 billion to buy TD Ameritrade in October 2020. It spent the following years paying that debt back—especially important because the Federal Reserve started raising interest rates in March 2022, which made holding onto expensive debt more costly.

Think of it like a mortgage: when interest rates go up, the cost of carrying debt goes up. Schwab reduced this burden by paying down what it owed, which improved its bottom line.

For discount brokerages, higher interest rates create a mixed picture. On one hand, they earn more money from the cash customers keep in their accounts. On the other hand, the debt costs more, and stock market downturns can hurt fees. Schwab managed both pressures well enough to beat expectations—something many competitors could not claim.

Why So Many Companies Are Disappointing

The broader earnings season has been rough. Companies across the S&P 500 are running into headwinds: inflation still raising the cost of materials and labor, supply chains that haven't fully healed, and consumers who are spending more cautiously as pandemic savings dry up.

When most companies miss their targets, the few that beat them stand out. Market reactions tend to be sharper. Schwab's share price jump followed this pattern.

What Interest Rates Mean for Financial Firms

Schwab's business depends heavily on the gap between what it pays customers on cash and what it earns investing that money. During 2020 and early 2022, when the Federal Reserve held interest rates near zero, that gap shrank. From March 2022 onward, as the Fed raised rates to above 5%, the gap widened. Firms like Schwab could earn more.

By paying down expensive debt, Schwab made that wider gap even more profitable. It's a straightforward way to adapt to a higher rate environment.

What This Might Mean Going Forward

The pattern of weak earnings across the market—with only a handful of companies beating targets—resembles what happened during past slowdowns, like 2015 to 2016 and early 2020. In both cases, companies that managed to outperform often became stronger competitors in the recovery that followed. It's too early to know if Q3 2024 marks a similar turning point, but Schwab's execution is worth watching.

For people with money in the stock market, one takeaway is straightforward: when earnings surprises become rare, individual company performance matters more. The broad market may not carry you through. Picking the right stocks becomes more important than usual.

For financial services companies in particular, the interest rate environment remains critical. If the Federal Reserve changes its approach to rates, it would directly affect how much money companies like Schwab can make. This is why their debt management choices matter so much right now.