Charles Schwab is Set for a Blowout Quarter Charles Schwab (NYSE: SCHW) is set to report its fiscal first-quarter earnings a week from today, and every indication is pointing to outstanding numbers for the discount brokerage. Has all of the upside already been priced in?

Charles Schwab (NYSE: SCHW) is set to report its fiscal first-quarter earnings a week from today, and every indication is pointing to outstanding numbers for the discount brokerage.

Schwab has come a long way over the last ten months.

Shares languished last summer as low-interest rates squeezed the company's net interest margin business. With the majority of Schwab's revenue tied to this practice of taking client cash balances and lending them out for higher yields, every basis point move in short-term rates has an impact on Schwab's top and bottom lines.

Back in June, it was clear that Schwab shares had more upside than downside because rates had more upside than downside – the Fed squashed the possibility of a sub-zero fed funds rate during the worst of the pandemic.

The Fed still hasn't hiked rates and seems like it won't until at least 2023. But with the Democrats controlling the Presidency and both Houses of Congress, government spending is set to balloon over the next couple of years, flooding the market with Treasuries. Investors have sold off Treasuries since the beginning of the year; the yield on the 10-year is now 1.68%, up from 0.93% at the beginning of the year.

Unsurprisingly, Schwab shares have roughly doubled since the dog days of last summer. But with potentially higher rates on the horizon and trading activity surging, the Charles Schwab rally could continue for a while longer.

Schwab's February Update Showed a Strong Business

In its February 2021 monthly activity report, Schwab delighted investors with its numbers:

• Core net new assets were $51.4 billion.
• Total client assets of $6.90 trillion were up 79% from February 2020.
• The discount brokerage added 1.2 million new brokerage accounts in February, up 200% from February 2020 and up 11% compared to January 2021.

Granted, the yoy comparisons are distorted by the TD Ameritrade acquisition, which closed on October 6, 2020, but still, this company is doing quite well.

The higher rates allow Schwab to extract higher revenue on existing clients, but don't explain the inflows and new accounts. Those could be explained by a) stimulus checks and b) social media influenced trading.

Over the last few months, millions of Americans have received two stimulus checks for a total of $2,000. Some of those people are struggling and used most of the money to catch up on bills, but a large percentage are doing just fine and treated it as found money.

With stocks surging since the lows of March 2020, a lot of people see an opportunity to parlay that found money into something more. And if plain vanilla blue-chip stocks are too boring, social media-influenced trading beckons. Whatever you think of the GameStop (NYSE: GME) saga, it has attracted new participants to the world of trading. Most of them don't have big enough accounts to move the needle for Schwab in an era of zero-commission trading, but there are a lot of them.

You may be thinking: this isn't going to end well for the new traders, and by extension, for Schwab.

But that may not be the case. There is a lot of uninformed (to put it nicely) money sloshing around the market now, but there's a good chance that many of them will a) learn how to trade or b) invest what they can afford to lose.

Schwab is Trading at a Reasonable Valuation

SCHW shares are up a lot since last summer but are still trading at less than 23x forward earnings. With rates still low by historical standards and the social media-influenced trading boom still in its early days, Schwab could see a lot of growth over the next few years.

How Should You Play Schwab?

Next week, Schwab is expected to report adjusted earnings of 74 cents a share in its fiscal first quarter. That number seems too low, but the whisper numbers are almost certainly higher – everyone sees the monthly updates, after all.

At the same time, shares are a bit extended after their recent run-up.

We could very well see some profit-taking after next week's release. If there is a post-earnings dip, you may want to pounce on it.