Schwab Beats Earnings Expectations as Most Companies Fall Short

Charles Schwab Corp. reported stronger profits than analysts had predicted in October 2024, pushing its stock price higher. The discount brokerage—a firm that lets ordinary people buy and sell stocks without paying large commissions—managed this feat while navigating an environment where most other big companies disappointed investors. Bloomberg reported that Schwab's win came partly because it is paying down expensive debts it took on during past acquisitions.

What makes Schwab's success notable is the timing. Across the S&P 500—the 500 largest U.S. public companies—firms are beating earnings estimates at the slowest pace in nearly two years as of October 2024, per Bloomberg. When most companies are missing targets, those that clear the bar tend to get outsized attention from investors.

How Schwab Cut Its Debt

The company's stronger-than-expected earnings tie back to its debt reduction strategy. Schwab borrowed roughly $26 billion to buy TD Ameritrade in 2020. Since then, interest rates have climbed sharply—the Federal Reserve (the U.S. central bank) raised its benchmark rate from near zero in March 2022 to above 5% by 2024. Higher interest rates make existing debt more costly to carry. By paying down these expensive loans, Schwab improved its bottom line.

Discount brokerages face a complicated tradeoff in any interest rate environment. Rising rates can boost the money these firms earn from customer cash balances—think of it as the spread between what they pay depositors and what they earn by investing those deposits. But higher rates also increase what the company must pay to borrow. Schwab's ability to thread this needle while exceeding earnings estimates signals disciplined balance sheet management at a time when many financial services firms have stumbled.

Why So Many Companies Are Stumbling

The third quarter of 2024 saw companies across many industries struggle to meet expectations. Inflation persists, squeezing input costs. Supply chains, though better than during the pandemic, remain disrupted for some manufacturers. Consumer spending has also shifted as households exhaust savings they built up during lockdowns.

When a wide majority of companies miss their targets, the bar shifts. Companies that do beat expectations stand out more. Schwab's stock jump reflects this scarcity value. It's what happens when positive surprises become rare.

The Interest Rate Backdrop for Banks and Brokerages

Firms like Schwab depend heavily on net interest income—the profit they make when rates on customer deposits are lower than the rates they earn on invested money. The Federal Reserve's aggressive rate increases starting in 2022 created an opportunity for these firms to widen those profit margins, as long as they could manage their own borrowing costs.

From March 2020 to March 2022, the Fed kept rates near zero. During that period, profit spreads for banks and brokerages shrank because there was little difference between what they paid depositors and what they earned. The subsequent rate hikes gave firms a chance to rebuild those margins—but only if they didn't carry too much expensive debt. Schwab's paydown strategy was a bet that managing debt mattered more than chasing short-term gains.

What This Teaches Us About Market Cycles

Over the past decade, I've noticed a pattern. When broad earnings beats slow to a crawl—as they are now—it often signals an economic inflection point, a moment when conditions are shifting. We saw something similar during the 2015-2016 earnings recession and again in early 2020 when the pandemic hit. In both cases, companies that managed to outperform during these tough periods often went on to lead their sectors through the recovery that followed.

It's too early to say whether Q3 2024 marks a similar turning point. But the absence of widespread earnings surprises makes careful stock-picking more important than it has been.

What This Means Going Forward

For investors and fund managers tracking financial services, Schwab's performance offers a useful measuring stick. A firm that beats expectations while also reducing debt shows the kind of operational discipline that may pay off in tougher times ahead.

The broader earnings picture carries weight for the entire stock market. When fewer companies deliver positive surprises, investor patience for disappointments wears thin. This can create volatility around earnings announcements, making which companies you own more critical than whether you own stocks at all.

One more variable matters: the Federal Reserve's next moves. Any shift in how quickly the Fed cuts or raises rates will directly affect how much money firms like Schwab can earn from interest margins. That's why the debt paydown Schwab executed isn't just about the past—it's about protecting earnings in whatever interest rate environment lies ahead.

Schwab's beat and the quiet surrounding most other quarterly results both send the same message: company-specific execution matters more when broader economic conditions turn less forgiving.