Let SOFI Stock Cool Off Before Hitting the ‘Buy’ Button

Stock Market

How can SoFi Technologies (NASDAQ:SOFI) stock go from hated in 2022 to loved in 2023? It’s all about central bank policy and the market’s expectations. In the end, SoFi Technologies will likely benefit from more accommodative monetary policy. However, the ultra-efficient market already knows this, and many of SoFi Technologies’ investors may have jumped the gun.

It’s encouraging to see SoFi Technologies evolve from a personal finance app to a legitimate, chartered bank. In the long run, SoFi’s investors will probably enjoy substantial returns. After a recent share-price rally, however, there’s no need to over-invest in SoFi Technologies.

SOFI Stock Goes Vertical

Why did SOFI stock jump from $6.50 in mid-November to nearly $10 in mid-December? That’s a gain of more than 50%, so cautious investors might wonder whether it’s justified.

SoFi Technologies’ most recent quarterly earnings report came out in October, so clearly, that wasn’t the catalyst. Furthermore, the Department of Education recently disclosed that it’s canceling nearly $5 billion of student-loan debt for over 80,000 borrowers.

In other words, the White House is signaling that it’s probably not finished with its quest to cancel some people’s federal student loan debt. That’s potentially bad news for SoFi Technologies, which generates some of its revenue from helping people refinance their student loans.

SOFI stock went vertical despite this news. Additionally, SoFi Technologies is terminating its cryptocurrency-trading services. This won’t make crypto bulls happy, but apparently, the market is still overwhelmingly optimistic about SoFi Technologies.

Curb Your Enthusiasm for SoFi Technologies

If anything can explain the abrupt rally in SOFI stock, it’s the ultra-efficient market’s assumptions about the future path of interest rates. If interest rates come down substantially in 2024, this would encourage borrowing and lending activity, which would certainly benefit SoFi Technologies.

Lately, the market has been very forward-looking and has already concluded that the Federal Reserve won’t hike interest rates in 2024. Furthermore, investors are operating under the assumption that the Federal Reserve will cut interest rates three times next year.

This may turn out to be a hasty assumption. New York Federal Reserve President John Williams explicitly stated, “We aren’t really talking about rate cuts right now.” Moreover, when asked about the prospect of an interest rate cut in March, Williams responded, “I just think it’s just premature to be even thinking about that.”

Enthusiasm for SoFi Technologies is overflowing mainly because the market is preparing for interest rate cuts that haven’t actually happened yet. If Federal Reserve officials like Williams basically tell stock investors to cool their jets, SOFI stock could fall as fast as it rallied.

SOFI Stock: Think Long-Term and Time Your Entry Carefully

SoFi Technologies has the potential to grow substantially in the long term. However, there’s no urgency to buy SoFi shares today. Timing is the key to success, and currently, the market is pricing in a best-case scenario for SoFi Technologies.

In other words, prudent investors can let SOFI stock come down 10% or 20%. Then, the risk-to-reward scenario will be more favorable. Just stay calm, have some dry powder ready, and temper your enthusiasm for SoFi Technologies with healthy skepticism.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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