AI stocks have rallied sharply but valuations remain disconnected from fundamentals, prompting caution from long-term investors

Palantir Technologies, Nvidia, and Broadcom have all rallied more than 500% in just the past three years, driven by strong results from AI investments.

Palantir trades at a price-to-earnings (P/E) multiple of more than 150, despite shares being down 23% this year. The company provides data analytics and an AI platform for business efficiency.

Extremely bullish investor sentiment on AI stocks has led valuations to become detached from reality, creating considerable downside risk when sentiment shifts, according to the article's analysis.