Executive Summary
Charles Schwab (SCHW) is the definitive dominance play in US wealth management, controlling $9.9 Trillion in client assets—more than the GDP of Japan and Germany combined. After a bruising 2023 defined by "Cash Sorting" fears and regional banking contagion, Schwab has emerged with its moat intact and its earnings power coiled. The integration of TD Ameritrade is delivering the promised $4B in synergies, and the "Cash Sorting" headwind is mechanically flipping into a tailwind as interest rates stabilize. We view SCHW not effectively as a bank, but as a capital-light asset gatherer disguised as one.
The Setup: Misunderstood & Undervalued
The market currently prices SCHW at ~15x normalized earnings, a discount to its historical 20-22x premium. This mispricing stems from a fundamental misunderstanding of the "Cash Sorting" phenomenon.
- The Fear: Investors believed clients would perpetually move cash from low-yield sweep accounts to high-yield money market funds, permanently impairing Schwab's Net Interest Margin (NIM).
- The Reality: Sorting has stabilized. As the Fed cuts rates in 2026, the spread between sweep cash and money markets compresses, reducing the incentive for clients to sort. Simultaneously, Schwab's short-term borrowing (FHLB advances) used to bridge the gap is being paid down, rapidly expanding NIM.