A Mixed Day for Financial Stocks Has Investors Hopeful Yet Concerned

The stock market continued its topsy-turvy behavior on Monday, bouncing back from a tough week with broad-based gains. The Nasdaq Composite (^IXIC 0.10%) enjoyed the biggest gains, with the S&P 500 (^GSPC 0.02%) and Dow Jones Industrial Average (^DJI -0.11%) following suit with advances that were still extremely strong.

Data source: Yahoo! Finance.

Financial stocks continued to release their latest financial reports on Monday, and big bank stock Bank of America (BAC -0.13%) gave shareholders the news that they'd hoped to see, sparking a sizable advance for the stock. Yet elsewhere in the sector, Charles Schwab (SCHW -0.05%) wasn't able to post share-price gains even with signs of recovery in one key moneymaking element of its business. Read on to learn more about the two reports and whether financial stocks in general should be participating in the current rally.

B of A has a grade-A report

Shares of Bank of America rose more than 6% on Monday. The banking giant's third-quarter results gave investors the confidence they'd hoped to have, with rising interest rates having a generally positive effect on the company's numbers.

B of A saw strength in several key metrics. Revenue was higher by 8%, driven by  greater activity levels among its client base. Net interest income soared by $2.7 billion to $13.8 billion, as higher rates boosted the amount B of A collected on loans and other forms of credit. Average loans and leases came in at $1.03 trillion, up $113 billion over the past 12 months.

B of A's consumer banking unit was notably strong, offsetting weaker performance in the global wealth and investment management segment as well as global banking. Global markets had mixed performance, with weaker revenue but greater net income than a year ago.

However, Bank of America didn't manage to grow its bottom line overall. Net income of $7.1 billion was down from $7.7 billion in the third quarter of 2021, translating to $0.81 per share in earnings. That was better than expected, however, giving shareholders some solace.

The bank also prepared for tougher economic conditions ahead, boosting its loss reserves by $378 million and paying charge-offs of $520 million. Yet CEO Brian Moynihan pointed to improving capital ratios and resiliency among consumers as supporting factors for the future of the business.

Schwab stock falls despite record results

On the downside, Charles Schwab shares were down more than 2%. The move came despite what the discount brokerage giant called the strongest quarterly performance in company history.

Schwab's numbers were attractive on their face. Revenue jumped 20% to $5.5 billion, topping expectations, with adjusted net income soaring 28% to $2.21 billion, working out to $1.10 per share. Even in one of the toughest stock market environments in history, Schwab attracted $115 billion in core net new assets, setting new records for retail fund inflows. The broker also held onto its clients, boosting active brokerage accounts by 4% to 34 million.

The biggest factor in Schwab's favor came from its 44% rise in net interest revenue, with its margin rising from 1.62% to 1.97%. That helped offset decreases in asset management and administration fees, many of which are charged based on a percentage of client asset balances.

Looking ahead, it's evident that investors expect that financial markets won't remain in their current doldrums for a long time to come. History supports that view, but inflationary pressures have proven to be stubbornly difficult for the Federal Reserve to address successfully. Whether or not rising short-term rates keep filtering into longer-term rates as well, the danger for both Bank of America and Schwab is that an economic downturn could be longer and more severe than expected.