What happened

This continues to be a year like no other. The bear market, rising interest rates, and 40-year-high inflation have dampened the spirits of consumers and investors alike. These factors have been easing somewhat in recent weeks, giving market watchers incentives to tiptoe back into the stock market.

It seems any bit of good news is an excuse to buy shares of beaten-down stocks. Furthermore, the Federal Reserve has signaled in recent days that it plans to continue its aggressive approach to taming rampant inflation.

This news sent shares of a number of financial technology (fintech) companies higher on Wednesday, as Block (SQ -2.28%) rose as much as 5.2%, Affirm Holdings (AFRM -0.45%) jumped as much as 5.1%, and Upstart Holdings (UPST -1.97%) surged as much as 4.8%. By the end of the trading day, the rally had lost some steam, but the trio were still trading higher, up 2.4%, 3.1%, and 0.8%, respectively.

So what

When the Federal Reserve Bank last met in late July, it maintained its campaign to combat surging inflation, raising interest rates by 0.75%, the second such rate hike in as many months. This brought the key federal funds rate to between 2.25% and 2.5%, its highest level since mid-2019. 

In the ensuing weeks, however, as inflation eased somewhat, market watchers were hoping the Fed might tap the brakes regarding future rate hikes. In July, the U.S. Bureau of Labor Statistics revealed that the Consumer Price Index (CPI) -- the most widely followed measure of inflation -- climbed 8.5% year over year, easing just slightly from 9.1% in June. 

Given the continued high rate of inflation, the central bank members were unmoved by the mildly improved data. Earlier this month, Chicago Fed President Charles Evans suggested that inflation remains "unacceptably high," leaving the door open for continued strong rate hikes. He said he expects "that we will be increasing rates the rest of this year and into next year to make sure inflation gets back to our 2% objective."

Now what

So just exactly what does this have to do with Block, Affirm, and Upstart stocks?

It's well documented that for banks and other lenders, there's a direct correlation between higher interest rates and increased profits. When interest rates are higher, banks capitalize on the larger spread between the rates banks pay for deposits and the rates they charge for loans. Simply put, when rates are higher, banks and other lenders make more money.

More specifically, each of these fintech companies is in a position to benefit from rising interest rates. Block's Square offers a suite of financial services to merchants and small businesses, including deposit accounts and loans. For its part, Affirm provides buy now, pay later financing to consumers, allowing them to purchase big-ticket items in installments. Upstart's cloud-based lending platform is used by a growing number of banks and financial institutions to qualify consumers for credit, so what's good for these lenders is good for Upstart.

Finally, each of these stocks is a relative bargain. Block, Affirm, and Upstart are currently trading near historically low valuations, trading at 4, 2, and 2 times forward sales, respectively. Investors are taking the opportunity presented by the easing bear market and cautiously wading back into stocks at bargain-basement prices. That increasing demand is helping drive these fintech stocks higher.