What happened

Wall Street headed toward the end of a bumpy week with another broad sell-off Friday morning after a government report showed continued strength in the job market, suggesting the Federal Reserve's campaign of aggressive interest rate hikes will continue.

That news sent shares of a number of fintech companies lower. On Friday morning, PayPal Holding (PYPL 0.33%) slipped by as much as 3.7%, SoFi Technologies (SOFI 0.11%) slumped as much as 5.3%, and Upstart (UPST 2.21%) was down by as much as 8.4%. As of 11:57 a.m. ET, they were still down 3.4%, 4.9%, and 7.3%, respectively.

So what

The monthly jobs report from the Bureau of Labor Statistics showed that U.S. nonfarm payroll jobs jumped by 263,000 on a seasonally adjusted basis in September, slightly below the 275,000 predicted by economists. While that was down from the 315,000 jobs added in August, the labor market remains strong. 

Another closely watched metric in the report that provided evidence of the resilience and tightness of the labor market was the wage number, which showed hourly earnings increased by 0.3% month over month, and 5% year over year. Furthermore, the unemployment rate continued its downward trend, falling to 3.5%, down from 3.7% in August. Economists had expected the rate to hold steady at 3.7%.

The government report was in line with data released earlier this week by payroll processor ADP, which found that U.S. businesses added 208,000 new jobs in September, higher than the 200,000 economists had predicted. 

This pair of jobs reports acted as a one-two punch to Wall Street as investors considered the possibility that high inflation would continue for a while, and what that might mean for the broader economy.

Now what

The Federal Reserve has made it abundantly clear that it will keep up its aggressive campaign of interest rate hikes until it successfully reins in inflation, which remains near 40-year highs. By making it more expensive to borrow money, the Fed hopes to slow economic growth, thereby cooling inflation. Unfortunately, this comes at a cost. Higher interest rates will likely lead to job losses and could eventually cause a recession.

The Fed's most recent rate hike came in late September, when it raised the benchmark federal funds rate by 0.75 percentage points. That was the third consecutive rate hike of that magnitude in since June. That pushed the federal funds rate up to a range of 3% to 3.25%, its highest rate in 14 years. Investors fear that, given the strong jobs report, the Fed will have no reason to temper its inflation-fighting strategy yet. The Federal Open Market Committee meets next in November to determine where rates go from here.

Financial institutions make money on the spread between the rates they pay to depositors and the rates they charge to borrowers. Generally, higher benchmark interest rates benefit those institutions because they tend to increase that spread. As such, companies like SoFi, which offers consumers a wide range of financial products and services, and Upstart, which uses artificial intelligence to help lenders determine the creditworthiness of subprime borrowers, might expect to do better in a rising rate environment.

The downside, however, is that the combination of higher inflation and rising interest rates could lead to a recession, which could cancel out those benefits. Furthermore, a lengthy economic downturn would weigh more heavily on people at the less-prosperous end of the financial spectrum, resulting in a higher rate of loan defaults and write-offs for lenders, which would hurt SoFi and the lenders that use Upstart's technology. PayPal's revenue comes primarily from the fees it generates on payment transactions, and transaction volume tends to suffer when the economy is struggling.

Given the challenges that remain, it's easy to understand why investors are dumping these fintech stocks as the probability of a prolonged downturn increases.

However, PayPal, SoFi, and Upstart are currently trading near historically low valuations, trading at around 3 times, 2 times, and 2 times next year's sales, respectively. For those who have the financial resources to invest now, and at least three to five years to hold on to their buys, this would actually be a great time to pick up shares of these companies at a discount.