The stock market was having a generally strong day on Wednesday, with the S&P 500 (^GSPC 1.68%) and Nasdaq Composite (^IXIC 2.23%) up by 1.7% and 2.3%, respectively, as of 10:30 a.m. ET. However, several financial technology, or fintech, stocks were spiking much higher.
Lending technology platform Upstart (UPST 8.44%) was higher by 12%, innovative brokerage app provider Robinhood (HOOD 9.11%) gained nearly 10%, and real estate technology platform Opendoor (OPEN 10.23%) was up by as much as 13% for the day. And there are good reasons behind all three moves.
Two tame inflation readings in a row
On Wednesday, we got the latest official look at CPI (Consumer Price Index) inflation data. Core CPI, which excludes volatile food and energy prices, came in at 3.2% year over year, which was better than the 3.3% economists had been expecting. On a monthly basis, core CPI increased by 0.2%, which was also one-tenth of a percentage point lower than expected.
One reason the market is receiving this report with such a positive move is that it comes just one day after another inflation metric, the Producer Price Index (PPI), showed that core PPI was flat month over month, compared with an expectation for an 0.3% rise. In other words, Wednesday's CPI reading helped show that the PPI data is the real deal, not just a single positive inflation data point.
The significance is that lighter-than-expected inflation could lead the Federal Reserve to lower interest rates in 2025. The median expectation heading into 2025 was for just a single quarter-percentage-point rate cut this year. But unexpectedly low inflation could lead to several additional cuts.
Lower interest rates are a tailwind, but for different reasons
All three companies stand to benefit tremendously from lower interest rates, but for very different reasons.
Upstart makes money by originating loans (mostly personal loans) on behalf of third-party bank partners. It was growing rapidly and was highly profitable during the low-interest rate period earlier this decade, but loan volumes have declined sharply as rates increased. Lower interest rates are likely to lead to higher loan volumes for Upstart, which could mean a return to profitability quicker than many expect.
Robinhood is an investment app that primarily relies on investment account inflows and trading activity to drive its business, as well as revenue from its Robinhood Gold subscription product. Lower interest rates would help Robinhood's business in a few ways, but increased interest in the stock market in a lower-rate environment would likely be a big catalyst for the business.
Finally, Opendoor is the largest company in the iBuying business, which involves buying homes directly from owners, making some cosmetic repairs, and flipping them to homebuyers. But one key point is that while Opendoor owns the properties, it is paying interest to finance them. Lower rates mean lower financing costs, which could help the company achieve profitability faster.
This week's inflation data is causing optimism about the future of Federal Reserve rate cuts, and all three fintech businesses are well positioned to benefit. If the Fed actually ends up cutting rates more than once in 2025, today's gain could be just a starting point.
