Shares of many tech and fintech stocks struggled today, as investors continued to navigate a difficult economic backdrop that is filled with uncertainty.
Shares of the artificial intelligence lender Upstart (UPST 3.44%) traded roughly 4% lower, as of 12:11 p.m. ET today. Shares of the Brazilian digital bank Nu Holdings (NU -0.55%) traded more than 12% lower and shares of the large payments company Mastercard (MA -0.88%) had fallen about 5%.
Investors are trying to figure out how the economy and market will fare after the Federal Reserve recently raised its benchmark overnight lending rate, the federal funds rate, by a full half-point, the largest increase seen in two decades. The move is an attempt to rein in inflation, which has risen quickly and led to consumers paying more for daily goods and services. Investors expect the Fed to continue raising rates this year.
Furthermore, the Fed is also planning to start running down its $9 trillion balance sheet. The market believes the Fed will have a tough time engineering a soft landing and could tip the economy into a recession. Russia's ongoing invasion of Ukraine and global supply chain issues are other challenges investors are trying to figure out as well.
A recession would be bad for Upstart, Nu, and Mastercard because most financial stocks are to a certain extent tied to the fate of the economy. While some inflation is often good for banking and payments companies, too much is overkill. Mastercard relies on consumer spending, Upstart needs people to take on personal debt without going into default, and Nu relies on a mixture of both.
Investors will be keeping a close eye on Upstart because the company is slated to report its first-quarter earnings after the market closes today, and hold an investor conference call. Analysts on average expect Upstart to report $0.51 earnings per share on revenue of about $300 million in the quarter. Based on some personal lenders that have already reported first-quarter earnings, I'm expecting a good quarter for Upstart, as origination activity looks to have been strong in the first quarter of the year.
But I expect the market to be more focused on management's future outlook into the unknown and how they think credit quality will hold up as the consumer enters a much more difficult environment.
Mastercard recently reported first-quarter earnings results, which pleased the market, as the company reported that gross dollar volume across its network grew 17% on a year-over-year basis. Management also said on the company's earnings call that it hasn't yet seen any impact on consumer spending from inflation, supply chain issues, geopolitical matters, or rising coronavirus cases. While this is good news, consumers are in an interesting place because, in general, they are in very strong financial shape but also entering an environment that could put pressure on their finances quickly.
As has been the case during this earnings season, while many tech and fintech companies have reported solid results and seen a temporary lift from earnings, it often hasn't been enough to overcome broader market and economic concerns. The market is really looking for more certainty to sustain any kind of momentum.
I definitely like Mastercard and think the company and the strong moat that it's built will be able to persevere through any kind of brief recession. While Nu and Upstart have strong prospects, I think they could continue to face some near-term volatility because they are riskier growth stocks right now and because the market is still trying to navigate through the uncertainty.