What happened
Shares of fintech leaders Marqeta (MQ 1.48%), SoFi Technologies (SOFI -0.42%), and Affirm (AFRM 0.91%) were rising today, up 6.5%, 8.7%. and 13.2%, respectively, as of 12:23 p.m. ET.
The only company that reported any material news lately was Marqeta, which announced a major product expansion yesterday and another partnership today. However, the across-the-board increase in fintech stocks likely had to do with a significant decline in long-term bond yields, which is likely helping growth stocks across many sectors today.
So what
Fintech names have been highly susceptible to the rapid change in interest rates this year, which is why they have been sold off so much. In fact, most fintech names have been some of the hardest-hit stocks in the market this year, with most down 70% to 95% since their peak in 2021.
With valuations down so much, any change in the narrative is likely to spark a rally. Today, long-term bond yields declined from their recent peak, with the 10-year Treasury Bond yield down 16 basis points, declining from 4.234% to 4.072% as of this writing.
The decline may be due to investors finally finding bond yields high enough to be attractive, and that view may be fueled by some signs of waning inflation. The S&P CoreLogic Case-Shiller 20-city house-price index for August came out today, showing a 1.3% decline in housing prices for that month. Shelter prices have been a huge factor in core inflation, so to see home prices come down may be an actual good thing for overall inflation and the path of interest rates.
Both SoFi and Affirm are lenders to some degree, but as newer companies in the financial sector, each depends on relatively high-cost, variable-rate funding that increases with rates. In addition, none of these companies are profitable, and long-term interest rates also play a big role in discounting future earnings. The further out in the future your profits are, the more those earnings are discounted by higher rates. Higher rates also have the potential to cause a recession, which wouldn't be a good thing for any financial company. Therefore, the reversal in bond yields is like rocket fuel for these stocks.
Moving to company-specific announcements, late yesterday, Marqeta unveiled Marqeta for Banking, a new suite of 40 digital banking APIs that can enable any non-financial company to launch its own financial services. With Marqeta's solutions, non-banks can now easily launch their own demand deposit accounts, direct deposit, ACH payments, fee-free ATMs, bill payment, and other banking services.
Marqeta followed up yesterday's announcement with a press release today, announcing a new customer win in Raiffeisen Centrobank, which has customers across Romania and Poland. The new partnership will see Marqeta power Raiffeisen's digital banking efforts in those countries.
Marqeta strangely sold off on the announcement yesterday, likely because the company didn't disclose anything new about its ongoing CEO search. However, the stock has regained its footing and is up over 6% today.
Now what
For those betting on a market rebound, the fintech sector could be one area that would see the most gains in a market recovery based on inflation and interest rates coming down.
Of course, this large potential upside comes with risks, so investors should really dig into these businesses for several factors. One, can this business make it through an economic recession? While companies that engage in lending are all black boxes to some extent, investors should try to gauge management's acuity for risk control, as well as the underlying business model and each company's target customer. For instance, Affirm's buy now, pay later audience may be a bit riskier than SoFi's focus on prime borrowers and graduate students. Meanwhile, Marqeta doesn't engage in lending at all, as its revenue is primarily tied to usage and financial activity.
In any case, today's gains show that fintech could be a cast-off sector to focus on for growth-oriented and aggressive investors playing a market rebound.
