What happened
Several popular fintech stocks rose with the broader market Monday after bank earnings continued to come in strong and as the British pound sterling stabilized.
Shares of artificial intelligence-powered lender Upstart (NASDAQ: UPST) were trading nearly 2.4% higher as of 12:56 p.m. ET. Meanwhile, digital bank SoFi (NASDAQ: SOFI) was up by more than 5%, and "buy now pay later" company Affirm (NASDAQ: AFRM) was up by roughly 8.5%.
So what
Despite a seemingly bad inflation report last week, stocks jumped, and that rally continued Monday as investors appeared to come to grips with the rapidly rising interest rate environment.
Additionally, bank earnings, which began to be reported on Friday, have continued to beat expectations and show that the U.S. consumer is still, on average, in quite healthy financial shape.
Image source: Getty Images.
Furthermore, in the United Kingdom, the new Treasury chief appointed by Prime Minister Liz Truss reversed nearly every financial proposal of his recently ousted predecessor, saying that the country will not implement the proposed tax cuts and spending that had sent the British pound into free fall and gilt yields surging.
On Monday, the pound moved higher compared to the U.S. dollar and gilt yields dropped significantly as the market gave a sigh of relief. Because the world is so interconnected these days, significant issues in major foreign stock markets can spook investors in the U.S. Lastly, it does seem like investors have concluded that the selling of recent weeks was overdone.
"The 200-week moving average is a serious floor of support until companies fully confess or a recession officially arrives, both of which could take several more months and lead to a technical rally in the short term," said Mike Wilson of Morgan Stanley in a research note.
Fintech stocks like Upstart, SoFi, and Affirm have been hammered this year due to the rising interest rate environment. Upstart relies on external capital to fund its loan growth, but the investors that typically supply that funding have been more reluctant to do so because of a higher cost of capital and a bleaker economic outlook.
Affirm has seen its loan losses rise in recent quarters, and the prospect of a severe recession has hurt all three of these stocks, as their businesses would suffer if consumer spending and business activity slowed.
Now what
The valuations of all three of these stocks have come tumbling down this year, but those declines have put them at more attractive entry points.
I still have concerns about companies like Upstart and Affirm. Rising interest rates have exposed some of the fundamental holes in Upstart's business model, and could also lead to further deteriorating credit quality at Affirm.
However, considering how far their share prices have dropped, if their management teams report improving lending conditions on their upcoming quarterly calls, or if the Fed shows signs of slowing the aggressive pace of its interest rate hikes, both Affirm and Upstart's stock prices could move higher.
Still, the only stock I like in this group is SoFi, as it caters to a much higher-quality customer base and has funding advantages because it's a bank and can therefore gather deposits.
