What happened
Last year, in the face of gale-force economic headwinds, the major market indexes -- on average -- delivered their worst performance in more than a decade. In 2023, however, it appears the clouds have lifted, and a new day has dawned for investors. Some of the most beaten-down companies of 2022 have become the breakout stocks of this year, driven higher by improving macroeconomic conditions and easing inflation.
Several financial technology (fintech) stocks that were punished last year got a boost this week from the improving conditions. Shares of Upstart Holdings (UPST 2.76%) surged 28.9%, SoFi Technologies (SOFI 3.69%) climbed 13.9%, and Lemonade (LMND 1.64%) stock rallied 13.7% this week, as of 12:55 p.m. ET Friday, according to data provided by S&P Global Market Intelligence. This far outpaced the 2.7% gain for the S&P 500.
Image source: Getty Images.
So what
The most significant economic headwind last year was the rampant pace of inflation, which hit roughly 40-year highs at its peak. This cut into buying power, causing consumers to rein in spending. The Federal Reserve Bank's campaign to get inflation under control resulted in 10 interest rate hikes over the past 18 months, bringing the overnight lending rate to a range of 5% to 5.25%, its highest rate in nearly 15 years.
However, recent inflation data suggests that the Fed's relentless stream of interest rate hikes is finally having the desired effect.
The latest monthly report on inflation, which comes courtesy of the U.S. Bureau of Labor Statistics, showed that consumer prices were easing, continuing a trend over recent months. The Consumer Price Index (CPI), the most widely watched gauge of inflation, increased 3% in June compared to the year-ago period while edging just 0.2% month over month.
The "core" data, which excludes volatile food and energy prices, also continued to ease, up 4.8% compared to this time last year and climbing 0.2% sequentially. The results were better than economists' expectations of a year-over-year increase of 5% and a sequential gain of 0.3%.
This also marked the lowest annual rate since October 2021. While still historically high, these ongoing incremental improvements in the inflation rate suggest that the worst has passed, and things will likely continue to get better from here.
Data by YCharts
Now what
These fintech stocks were punished during the downturn, with Upstart, SoFi, and Lemonade plunging 91%, 71%, and 68%, respectively, in 2022, so naturally, their rebounds will be more pronounced. That's exactly how it's been playing out so far this year, as Upstart, SoFi, and Lemonade stocks have surged 255%, 97%, and 38%, respectively. The improving economic conditions bode well for the stock market in general but may be more beneficial for these three stocks:
- Upstart is using artificial intelligence (AI) to disrupt the consumer lending business by using a greater number of factors to determine creditworthiness. The extended period of rising interest rates didn't do Upstart any favors, as consumers were more reluctant to take out loans with high interest rates. Improving conditions bode well for Upstart, but the Fed has signaled it isn't done raising rates -- at least not yet.
- Lemonade offers consumers a suite of insurance products, including renters, homeowners, life, pet, and auto insurance. The challenging economy made people less likely to take on additional financial obligations. The improving conditions will likely loosen purse strings, which bodes well for Lemonade.
- SoFi began its fintech journey as a student loan provider but now offers an ever-expanding suite of financial products and services. That said, its loan originations stagnated during the downturn as consumers were reluctant to take on loans amid rising interest rates. While it will still be some time before rates begin to fall, investors see the light at the end of the tunnel.
I'd be remiss if I didn't address the 800-pound gorilla in the room. These rapidly improving stock prices -- ahead of an eventual and more robust rebound in financial performance -- have caused a commensurate increase in the valuation of these stocks. Upstart, SoFi, and Lemonade are selling for roughly 5 times, 3 times, and 3 times next year's sales, so they aren't the screaming bargains they were just a few months ago.
These stocks will remain volatile for the foreseeable future -- making significant moves up and down -- so investors may need to be patient and keep their eyes on the prize. For those with an appropriate three- to five-year investing timeline, these stocks still represent compelling opportunities.
