What happened

Coming off their best two-day rally in two years, stocks dropped on Wednesday after a better-than-expected jobs report this morning and as Treasury yields bounced.

Shares of the digital bank SoFi (NASDAQ: SOFI) traded roughly 5% lower as of 11:53 a.m. ET today. Meanwhile, shares of the buy now, pay later company Affirm (NASDAQ: AFRM) and the artificial-intelligence lender Upstart (NASDAQ: UPST) both traded about 6% down.

So what 

Yesterday, stocks rallied after the Reserve Bank of Australia raised its benchmark interest rate by only 25 basis points instead of the 50-point hike that was expected. That led investors to believe that perhaps the Federal Reserve could begin to slow the pace of its rate hikes as well.

Cylinders in descending order left to right.

Image source: Getty Images.

But this morning, more data suggested that the labor market was still strong in September, which would not support the Fed's easing up because Fed Chairman Jerome Powell has previously said that it needs to see the labor market cool off a little bit.

According to the payroll firm ADP, private payrolls added 208,000 jobs in September, which came in better than the 200,000 estimate. Investors use ADP to project how the official jobs report from the U.S. Labor Department will come in. The new September data will be unveiled on Friday.

ADP's chief economist, Nela Richardson, said:

There are signs that people are returning to the labor market. We're in an interim period where we're going to continue to see steady job gains. Employer demand remains robust, and the supply of workers is improving -- for now.

The unemployment rate in August sat at a healthy 3.7% but cracks in the labor market can be a lagging indicator. Peter Essele of the broker Commonwealth Financial Network also wrote in a note today that the increase in September hiring is still well below average gains seen over the past 12 months.

Rate hikes have been an absolute headache for high-flying fintech and tech companies like SoFi, Affirm, and Upstart, all of which rose to massive valuations toward the end of 2021.

Upstart has relied on institutional investors to fund and purchase loans it makes to customers, many of whom are near-prime borrowers. That worked when interest rates were low and credit conditions were benign, but now a higher cost of capital and fears over the economy have frozen a lot of this funding, putting growth on hold. Investors are also worried about rising loan losses at Affirm. 

Now what

I wrote yesterday that I didn't think investors should draw a direct correlation between the Reserve Bank of Australia's moves and the Fed. Rather, I think upcoming inflation data on Oct. 13 will be pivotal in determining the Fed's next rate move on Nov. 2.

If inflation can show signs of peaking and declining, then the Fed could very well slow the pace of rate hikes after doing three consecutive 75-basis-point hikes at its last three meetings. But if inflation stays hot, expect another jumbo hike.

Rate hikes are pretty much bad for most stocks at this point, but of these three, they will likely hit Upstart and Affirm harder. SoFi could certainly see loan growth slow down in a higher-rate environment or a more severe recession, and loan losses might grow as well. But SoFi is also catering to a customer base of much higher quality, which should make its credit more resilient.