We recently compiled a list of the 10 Best Financial Services Stocks To Buy According to Analysts. In this article, we are going to take a look at where The Charles Schwab Corporation (NYSE:SCHW) stands against the other best financial services stocks to buy according to analysts.
According to the Financial Industry Index, which increased by more than 30% by mid-December and beat the overall market by about 5 percentage points, 2024 was a spectacular year for the financial industry. This growth followed concerns about mid-sized bank collapses in early 2024, which proved to be isolated incidents rather than an issue impacting the industry as a whole.
Meanwhile, as we have mentioned in our article, 10 Best Financial Stocks To Buy According to Hedge Funds, the market for financial services has expanded significantly in the last several years and is further expected to grow at a compound annual growth rate (CAGR) of 7.7% in the next few years.
Amidst the growth, as per EY’s report, the financial services industry is also undergoing a change because of artificial intelligence, particularly generative AI, which boosts productivity, modifications, and innovation. AI is helping banks provide individual solutions and improve risk control while accelerating processes like fraud detection, loan processing, and customer support. Large financial institutions are using AI to lower expenses, improve compliance, and create new products like automated tax compliance and predictive analytics. Nonetheless, issues like data privacy, rules of conduct, and AI’s “black box” decision-making continue to exist. Notwithstanding these obstacles, artificial intelligence is revolutionizing financial services by spreading beyond banking to include wealth management, insurance, and payments.
According to IBM’s report 2024, Generative AI is revolutionizing financial services by improving customer satisfaction and propelling advancements in risk assessment as well as personalized financial solutions. Secondly, the use of hybrid clouds is growing as companies seek to boost compliance, scalability, and efficiency. Thirdly, cybersecurity is still crucial, with growing investment in fraud detection systems as AI-driven threats emerge. Businesses are putting a greater spotlight on sustainability by giving green financial products and ESG initiatives top priority. By utilizing AI technologies such as Watsonx Assistant, customer experience management (CXM) increases customer pleasure and loyalty. Moreover, the use of open banking is growing as a result of APIs’ ability to simplify procedures and provide customers with more control over their data. Secure online transactions are being reinforced by the resurgence of digital currencies and blockchain.
Looking ahead, Deloitte’s 2025 investment management outlook predicts that AI, digital transformation, and changing investor demands will quickly impact the investment management industry in 2025. Low-cost funds are dominant, with active management flourishing within ETFs. Sustainability-focused investments, hybrid funds, and private financing are important growth areas. AI has exceeded expectations and is transforming operations and sales, but companies that are not embracing it quickly could fall behind. Regulatory changes, cybersecurity, and the combination of traditional and alternative assets are examples of growing risks. While some companies may find it difficult to survive in a high-risk, high-reward environment, bold companies that use AI and diversify their products may benefit from these changes. The key to success is scaling innovation and satisfying the need for sustainable, affordable solutions.
On the other hand, Deloitte’s 2025 banking and capital markets outlook report stated that banks can strengthen their basis for sustainable growth with creativity and discipline as the banking industry adjusts to a low-growth, lower-rate environment. It is anticipated that GDP growth will be 1.5% in 2025, and inflation will be approaching the 2% target, presenting a low-growth, lower-rate scenario for US banks. With savings exhausted by March 2024 and debt reaching $17.7 trillion, consumer spending may decline. Net interest margins may be compressed as a result of declining interest rates, with the federal funds rate falling to 350-375 basis points. Noninterest income presents opportunities, but growing salaries and technology expenditures drive up costs. Credit quality may slightly improve but is expected to stabilize. As geopolitical and regulatory uncertainty further complicate the picture, Deloitte observes that weak business investment and higher deposit costs will test banks’ adaptability.
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Methodology
We sifted through holdings of financial ETFs and online rankings to form an initial list of 20 financial services stocks. From the resultant dataset, we chose 10 stocks with a projected upside potential of over 7% based on analyst price targets, as of January 9. The stocks are ranked according to their upside potential. We also considered hedge fund sentiment around each stock using Insider Monkey’s data for Q3 2024.
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)
The Charles Schwab Corporation (NYSE:SCHW)
Upside Potential as of January 9: 11.96%
One of the Best Financial Stocks, 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.
The Charles Schwab Corporation (NYSE:SCHW) 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.
The Charles Schwab Corporation (NYSE:SCHW) produced strong third-quarter results, with net revenues rising 5% year over year to $4.8 billion, fueled by market performance and ongoing investor engagement. The company’s total client assets reached a record $9.92 trillion, up 27% year on year, thanks to solid asset acquisition and equity market resilience. The quarter’s core net new assets came to $95.3 billion, increasing the year-to-date total to $252.1 billion, a 10% increase over 2023. The adjusted diluted earnings per share were stable at $0.77, while the adjusted net income was $1.5 billion. Trading revenue rose 4% year over year, while adjusted pre-tax profit margins improved to 41.2%. Along with continuing to cut back on supplemental funding, Schwab also reported sequential growth in client transactional sweep cash balances, reaching $384 billion. These outcomes highlight Schwab’s solid operating momentum and careful financial management.
The Charles Schwab Corporation (NYSE:SCHW)’s strong market position and development potential have led analysts to award the company a Buy recommendation. The average price objective indicates a possible gain of 11.96% from the current stock price of $73.00.
Natixis Global Asset Management’s Harris Associates was the largest stakeholder in the company among the funds in Insider Monkey’s database. It owns 28.23 million shares worth $1.83 billion as of Q3.
RiverPark Large Growth Fund stated the following regarding The Charles Schwab Corporation (NYSE:SCHW) in its Q3 2024 investor letter:
“The Charles Schwab Corporation (NYSE:SCHW): SCHW was a top detractor in the third quarter following an uneven second quarter earnings report. After two quarters of stabilization of client deposits and continued reduction of short-term high-cost funding, both metrics reversed in the second quarter causing the company to lower near term EPS expectations. Client deposit accounts, though no longer materially impacted by cash sorting (clients moving cash to higher yielding instruments), declined more than expected as clients used this cash to pay taxes. Lower than expected deposits in turn limited SCHW’s ability to continue to pay down higher cost funding sources ultimately leading to lower spread income. While near term EPS expectations were lowered, we believe that 1) higher spreads should still materialize even if delayed and 2) client assets in the aggregate continue to grow at a healthy pace driven by market gains and organic growth.
Schwab has been the leading share gainer in the discount brokerage industry over the last decade, generating substantial organic asset growth while also growing operating margins and remaining amongst the price leader on all products. Revenue should continue to accelerate in the coming quarters as lower interest-bearing assets mature, which will allow the company to pay back higher cost short-term funding and invest at higher prevailing rates. We believe the company has emerged from the mini bank crisis of 2023 in an even stronger position to gather assets and drive long-term margins and free cash flow in the years to come.”
Overall, SCHW ranks 5th on our list of the best financial services stocks to buy according to analysts. While we acknowledge the potential for SCHW to grow, 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.
