AI stock prices detached from $trillions in fundamentals, Green warns

AI stock prices have detached from business fundamentals as investors ignore the threat from distillation and Google's mark-up of its Anthropic stake inflates earnings, Simplify's Michael Green said.

"It is totally absurd that investors are putting a multiple on Google's earnings which were boosted by the company's marking up of its position in Anthropic," Michael Green, chief market strategist and portfolio manager at Simplify Asset Management, said in an interview.

Green said George Soros' theory of reflexivity — where rising prices fuel further buying, creating a self-reinforcing loop — is playing out in AI stocks. The dynamic has pushed valuations beyond levels supported by business fundamentals. The rise of AI distillation, a technique that allows rivals to replicate frontier models at a fraction of the cost, threatens to erode returns on the trillions of dollars invested in the sector, according to a Business Insider analysis.

The warning carries implications beyond individual stocks. Green said the popularity of levered exchange-traded funds is amplifying market volatility, a dynamic that could hit countries like South Korea particularly hard as global capital rotates out of overvalued tech names. If investors begin scrutinizing earnings quality more closely, the AI trade could face a sharp unwind.

Reflexivity and the AI Feedback Loop

Green's reference to reflexivity is particularly relevant for AI stocks, where rising share prices have enabled companies to raise capital at favorable terms, fund more aggressive investment, and justify even higher valuations. The feedback loop has drawn comparisons to the dot-com era, when valuations detached from earnings before a sharp correction.

Distillation Threatens the AI Business Model

The economics underpinning AI investment are under threat from distillation, a technique that lets competitors replicate frontier models cheaply. Anthropic recently accused Chinese tech giant Alibaba of using malicious distillation techniques, creating tens of thousands of fake Claude accounts to harvest answers en masse. "This inverts the economic logic that underwrites American AI leadership, turning billions of dollars worth of research and development, compute, and other US investments into a subsidy for our competitors," Sarah Heck, Anthropic's head of policy, wrote in a letter to US politicians.

OpenAI has warned that distillation could eventually create models that outperform today's frontier systems. "By blending outputs from multiple US models, adversaries could replicate and even combine frontier capabilities in ways that surpass any single teacher model," the company said.

For investors, the combination of stretched valuations, earnings quality concerns, and structural threats to AI's business model creates a fragile setup. Green's warning suggests that the market may be pricing in a perfect outcome for AI that leaves little room for disappointment. Nvidia, Microsoft, and Google — the three largest beneficiaries of AI infrastructure spending — could face the most acute revaluation if the thesis cracks, as the distillation threat directly undermines the pricing power that justifies their current multiples.

This article is for informational purposes only and does not constitute investment advice.