What happened

Shares of SoFi Technologies (SOFI 0.12%), Upstart (UPST -0.94%), and Affirm Holdings (AFRM -0.94%) rose double-digits this week, up 11.9%, 10.6%, and 29%, respectively, as of the end of Thursday's trading.

Each had already seen their shares under pressure heading into this week due to inflation fears and negative analyst notes during the week prior. However, last Friday, two favorable economic reports, as well as favorable commentary from CEOs of some large banks, helped sentiment turn around -- at least for the moment.

So what

Last week, all three were hit by the June inflation report, which came in hotter than expected. That prompted fears the Federal Reserve would have to move quickly to tame inflation, perhaps triggering a recession.

Additionally, both Upstart, which uses artificial intelligence to underwrite loans, as well as Affirm, a buy-now-pay-later platform, each received negative reviews from Goldman Sachs' (GS 0.15%) fintech analyst Michael Ng. Ng initiated Affirm with a "neutral" rating based on underwriting concerns, and downgraded Upstart to a "sell" based on growth concerns, as its third-party funding sources have dried up.

However, the macroeconomic fears from early last week were allayed somewhat last Friday. That's when the June retail sales report came out, showing a 1% increase over May, surprising to the upside after May's 0.1% decline. Additionally, that May decline was revised up from the initial 0.3% figure given last month. The report seemed to show consumer resilience in the face of ongoing inflationary pressures.

The report also seemed to confirm what some top bank CEOs said on earnings calls last week -- that at the moment, consumer spending remains healthy, with no signs of a recession today or in the near term.

A second key report also came out last Friday, that being the University of Michigan inflation expectations report. The report showed a slowing of inflationary expectations over the next five years, at just 2.8%. Importantly, that was down from 3.1% in the prior month, which had been revised down from an initial 3.3% figure. The initial 3.3% figure from early June is partially what had prompted the Fed to raise interest rates by 75 basis points last month instead of 50 because Fed officials really don't want inflation expectations getting entrenched in the economy. Therefore, slowing inflation expectations, likely having to do with falling commodity prices, could enable the Fed to hike rates more slowly going forward.

In any case, a healthier-than-feared consumer and a Fed that perhaps doesn't have to hike as much would be good for all lenders and financial companies, these fintech stocks included. Given they had fallen so far already this year, it appears investors are looking for a bottom amid some hopeful signs. 

SOFI Year to Date Total Returns (Daily) Chart.

SOFI Year to Date Total Returns (Daily) data by YCharts.

Now what

While this week was nice, investors in these stocks aren't totally out of the woods just yet. The Fed has not yet arrested inflation, which is nowhere near its long-term 2% target. Furthermore, I'm a tad worried about these three companies' competitive positions. In recent months, Upstart has seen higher-than-expected charge-offs, and its funding sources have dried up amid higher rates. That makes me question whether its business model can work as well as initially hoped when it came public. 

Competitive concerns also abound for Affirm, which has myriad competitors getting into the buy-now-pay-later (BNPL) field. These include not only a host of strong fintech companies but even Apple (AAPL -1.00%), which has recently thrown its hat into the BNPL ring.

I do have a bit more affinity for SoFi's model, which aims to recruit Prime borrowers with student loans while in college or grad school, with the assumption they will become well-earning, credit-worthy customers over time. From there, SoFi cross-sells more financial products, from home and personal loans to brokerage, credit cards, and checking and savings accounts.

Still, even SoFi is still printing hefty losses on a generally accepted accounting principles (GAAP) basis and is not immune to macroeconomic headwinds. The company actually filed a shelf prospectus last Friday afternoon, which gives SoFi the ability to raise $1 billion through any combination of equity, debt, preferred stock, units, or warrants. It's not clear if SoFi will use the shelf offering to raise money, but it probably wouldn't be so great for shareholders if it did, given that its stock is down 56% this year and interest rates are higher.

While these three stocks are down a lot, their upside is predicated on the macroeconomic picture turning around. Furthermore, each is still generating losses, and the cost of capital is higher today, making them high-risk, high-upside bets appropriate only for the most risk-on investors with a long time horizon.