What happened

Shares of fintech stocks Upstart (UPST -0.81%), SoFi Technologies (SOFI -0.58%), and Affirm Holdings (AFRM -3.10%) were plummeting today, down 8.5%, 5.1%, and 11.9%, respectively, as of 12:53 p.m. ET. 

There wasn't much company-specific news today, but as always, these fintech names are extremely sensitive to the market's outlook for interest rates and the potential for a recession next year.

On those fronts, today's better-than-expected retail sales data could actually be interpreted as a negative, as that data point seemed to contradict recent softer inflation reports. On the other hand, retailer Target (TGT 0.43%) reported lower-than-expected profits and warned of a soft holiday quarter.

In addition, Fed official Esther George gave very hawkish commentary in this morning's Wall Street Journal, while another Fed official Mary Daly gave similarly hawkish commentary in an interview on CNBC. A hawkish Fed in the face of a softening economy could lead to a recession. 

So what

This morning, October retail sales data came in at a 1.3% increase over the prior month, which was more than the 1% increase analysts had predicted. Retail sales were up 8.3% year over year, but remember, the data doesn't adjust for inflation, so the amount of goods and services sold within the retail data was up much less than that figure.

The better-than-expected sales figure could actually be perceived as a negative, in that it may embolden the Federal Reserve to continue raising interest rates, which raises the risk of a more severe downturn.

To that point, Target announced third-quarter earnings today, in which management lowered its outlook for the fourth quarter. In its release, management said, "Based on softening sales and profit trends that emerged late in the third quarter and persisted into November, the Company believes it is prudent to plan for a wide range of sales outcomes in the fourth quarter, centered around a low-single digit decline in comparable sales, consistent with those recent trends."

That dour outlook could affect Affirm's fourth-quarter outlook, as the buy now, pay later platform has a partnership with Target that it inked about one year ago. This is likely why Affirm declined more than both Upstart and SoFi today; however, all three of these fintech stocks are lenders, and would be harmed by an economic downturn.

Unfortunately, Federal Reserve officials continued to sound hawkish this morning, even in the face of last week's softening inflation figures as well as Target's downbeat outlook. In the Wall Street Journal, Kansas City Fed President Esther George said that while goods inflation was coming down, price pressures in labor-intensive services and the persistent labor shortage would likely keep the Federal Reserve on its rate-hiking path -- even though it was likely to result in a recession.

"I have not in my 40 years with the Fed seen a time of this kind of tightening that you didn't get some painful outcomes," she said. Moreover, San Francisco Federal Reserve President Mary Daly told CNBC, "Pausing is off the table right now. It's not even part of the discussion."

Now what

Taken together, all this commentary suggests the Federal Reserve could keep hiking the economy into recession. That would really be bad for all financial companies and especially fintech companies, as they have the risks of borrower defaults, as well as higher costs of funding than larger traditional banks.

Upstart in particular is having a difficult time, as it's highly dependent on third-party loan buyers that are fleeing the market right now. Upstart also concentrates on borrowers who may have lower FICO scores, as its whole premise is that certain borrowers are underrated by traditional credit scoring. So, investors may think its loans are riskier, and we really won't know the answer until the company endures a recession.

While SoFi tends to focus on better-off borrowers who have gone to graduate school, it's not immune from macroeconomic pressures. After all, we are hearing about layoffs across Silicon Valley and the technology space, where employees are usually well-educated. SoFi has also been raising its rates on personal savings accounts, increasing its cost of borrowing. While SoFi has a banking license and is in a better position than Upstart, its saving accounts currently yield 3% and its checking accounts pay depositors 2.5%, which is much higher than large money center banks.

Fintech stocks are of course down a lot this year, and are pricing in severe risks, but for the bold investors in the sector, you have to have confidence any fintech company you have in your portfolio can get through a bad recession. If it does, these could be great long-term prices for these stocks; however, there are clearly high risks in the year ahead.