What happened
Shares of fintech stocks Upstart Holdings (UPST 0.07%), SoFi Technologies (SOFI 1.56%), and Affirm Holdings (AFRM 4.97%) rocketed higher on Wednesday, up 13.9%, 6.9%, and 13.1%, respectively, as of 1 p.m. ET.
There's no big secret as to what is moving these beaten-down stocks today: a better-than-feared inflation report from the Bureau of Labor Statistics this morning.
NASDAQ: UPST
Key Data Points
So what
Coming into today, these stocks were down massively from their all-time highs set last year. Even after today's bounce, SoFi is down 50%, Affirm is down 63%, and Upstart is down 79% year to date.
Fintech stocks were perhaps the worst positioned of all sectors heading into the current inflationary environment. Since they are generally high-growth, low- or no-profit stocks, they were highly sensitive to rising long-term interest rates. That's because the further out your company's profits, the more they are discounted by higher rates, and the less they are worth in present-value terms.
These companies are also sensitive to credit, which many are fearing will deteriorate in an economic downturn. Of note, Upstart has run into some recent problems, as its artificial-intelligence-powered underwriting models were caught off guard by the high-inflation environment.
On its recent earnings release, Upstart management disclosed that expected returns on its 2021 loan vintages, made on the eve of the inflationary spike, were drastically lower than the prior few years due to increased charge-offs -- though returns were still positive. Of note, management has made adjustments to its models, and 2022 vintages are estimated to improve, albeit not back to prior levels.
Upstart and buy now, pay later platform Affirm are perhaps more sensitive to credit concerns, as they target less affluent near- or subprime borrowers, whereas SoFi targets a higher-earning consumer. That's why SoFi wasn't down quite as much, and isn't rising quite as much today.
Still, an economic downturn is generally thought of as bad for all financial stocks, SoFi included. And investors have been fearing that the higher the inflation numbers are, the more the Federal Reserve will have to hike rates and force a bad recession in order to get prices back under control.
That's why Wednesday's consumer price index (CPI) report for July was such a relief. The total inflation figure was up 8.5% year over year, which is still very high, but below expectations of 8.7% and well below the 9.1% figure reported in June. Of note, the month-over-month figures showed a 0% change in inflation. Stripping out volatile food and energy prices, "core" CPI came in at 5.9%, below expectations of 6%, with a month-over-month increase of 0.3%, the lowest monthly increase since March.
The reprieve on inflation means a potential reversal of all the bad effects inflation had on fintech stocks; hence, why they are soaring today.
Now what
If you are growth investor looking for explosive gains coming out of this market downturn, one would logically look at the most beaten-down sectors, such as fintech.
While it is not inevitable that beaten-down stocks will reach their previous highs anytime soon, these three certainly seem like good places to look for younger investors aiming to get more aggressive in higher-risk, high-upside plays.
Just be aware that these stocks, which are relatively new to the public markets and therefore somewhat unproven, remain highly sensitive to the macroeconomic environment, both to the upside and the downside.
