What happened

Shares of fintech stocks Marqeta (MQ -3.51%), Affirm (AFRM -5.17%) and LendingClub (LC -0.21%) were rallying big on Thursday, up a whopping 17.5%, 22.1%, and 13.8% as of 10:44 a.m. EDT, respectively.

It wasn't hard to figure out why: Today's inflation report came in cooler than expected, a welcome change from the hotter-than-expected prints we've been used to seeing this year. Lower inflation figures could mean the Fed will slow or even stop its aggressive interest rate hikes, which have been wreaking havoc on financial markets and especially newer and smaller financial stocks such as these three.

In addition, Marqeta reported its third-quarter earnings last night, delivering better-than-expected revenue results and even better-than-expected revenue guidance. Both Affirm and LendingClub had already reported their third-quarter earnings; while their reported quarters were pretty solid, conservative forward guidance had caused a sell-off to rock-bottom prices, so it's no surprise to see them galloping higher as well on the good inflation news.

So what

This morning's Consumer Price Index (CPI) came in at 7.7% year over year and 0.4% month over month, which was lower than the 7.9% and 0.5% expected forecast. Perhaps more important, "core" CPI, which strips out volatile food and fuel prices, came in at just 6.3% year over year and 0.3% month over month, lower than the 6.5% and 0.5% expected.

Why is inflation data so important? Because the Federal Reserve reacts to data, and it has been frantically trying to put a lid on inflation all year, with a series of aggressive 75-basis point hikes over the last four Fed meetings. The longer inflation stayed hot, the longer and higher the Fed would likely go. And the longer and higher interest rates go, the greater the probability of overshooting, thereby throwing the economy into a recession.

However, if inflation cools, as it's appearing to today, the Fed can slow or even stop its rate hikes, increasing chances for a "soft landing" or only a mild downturn.

Fintech stocks have been especially hard hit by the rapid interest rate increases, as rapid rate hikes are the worst of all worlds for these names. Higher rates lower the value of future earnings, harming virtually all growth stocks with little or no profits.

Second, unlike some recurring software stocks or utility stocks, for instance, fintechs are also economically sensitive, especially companies like Affirm and LendingClub that take credit risk.

Finally, fintechs often have higher funding costs than large money-center banks, and rapidly rising rates may put them at a competitive disadvantage for high-quality borrowers, since they tend to have a higher hurdle rate for their loans.

That's why the sector has been so catastrophically bad this year -- and why it is ripping higher today.

In addition, Marqeta reported solid third-quarter results last night. Revenue soared nearly 46% in the third quarter, ahead of expectations; while losses per share missed expectations by a penny, that was due to a unique one-time cost, according to management, and Marqeta is still investing heavily in both product and geographical expansion.

Meanwhile, the company's forward guidance, while projecting a deceleration to between 29% and 31% in the fourth quarter, was far ahead of analyst expectations of just 22.9% growth.

Marqeta is actually a unique stock in that it's relatively new to the public markets and a profit-less growth stock, but it also has the balance sheet and low cash burn to repurchase its own stock while also investing in the business. That makes it a name to watch among beaten-down fintech stocks, as Marqeta may be able to mitigate most of its dilution from stock-based compensation, which is a huge cost for many young growth stocks.

Marqeta doesn't take credit risk itself, but its API platform is the technology backbone for many other fintechs and even traditional finance companies, so its stock had been beaten down along with riskier fintech companies. However, on the conference call with analysts, management pointed out that while new and smaller customers in the crypto and fintech worlds had slowed as expected, larger customers were actually outgrowing expectations, as they looked to take advantage of their size and strength relative to smaller competitors. Therefore, revenue was outgrowing expectations, even in a slowing economy.

So what

If inflation cools and the Fed is able to ease off rate hikes sooner than thought, leading to a "soft landing" or at least a shallower-than-expected recession, I think fintech stocks could have some of the biggest gains, as they have sold off among the most of any subsector.

At least for one day, that's looking to be the case. However, investors should be aware that today's CPI report was for only one month, and future reports could disappoint. Furthermore, if we do indeed undergo a significant recession, fintech stocks could again go down significantly.

Therefore, interested investors should dig into their favorite fintech companies, but maybe keep these types of stocks at a reasonable allocation.