AI Euphoria Fades: Is the IT Sector Entering a Reality Check?

AI euphoria is cooling, valuations are stretched, and global money is rotating away from tech excesses. This story examines the NVIDIA reality check, FPI shifts, and why India’s IT sector may emerge stronger as the world enters an AI implementation era [EasyDNNnews:PaidContentStart]

The Exuberance Behind the AI Mania
Every market cycle is shaped as much by human psychology as by earnings, demand and supply, or macro-economic conditions. There is a strange, almost philosophical truth behind bubbles: “Deep down everyone, in their heart, wants this whole world to sink.” Not because investors wish for destruction, but because, instinctively, people sense when valuations have become detached from reality. When the disconnect grows too large, the mind braces for a correction long before the charts reflect it. 

Artificial intelligence triggered that very sentiment. Over the past two years, it was not viewed merely as a technological shift, but elevated into something akin to a new economic religion — a force believed capable of delivering infinite productivity and limitless profitability. That faith pushed valuations into zones even aggressive investors struggled to justify. 

Nothing symbolised this more than the rise of the Magnificent Seven — Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla. At their 2025 peak, these seven alone accounted for over 36 per cent of the S&P 500’s total market capitalisation. For a mature economy with thousands of listed companies, such concentration is extraordinary. Investors weren’t merely betting on dominant companies; they were placing their chips on the future of capitalism itself. 

But this concentration masked a deeper tension. AI is transformative — but markets priced it as if that entire future had already materialised. 

The Nvidia Reality Check
Amid growing fears that the AI bubble was overheating, Nvidia’s Q3 FY2026 results (quarter ending October 2025) stunned even the optimists and redefined market expectations. The numbers showed that AI infrastructure demand remains not only real, but extraordinary: 

▪️Revenue surged 62 per cent YoY and 22 per cent QoQ to US$57.06 billion.
▪️Data-centre revenue hit US$51.2 billion, up 66 per cent YoY and 25 per cent QoQ.
▪️Hyperscaler demand continued to exceed supply, keeping Nvidia in a supply-constrained environment.
▪️Q3 revenue and earnings beat every major analyst estimate.
▪️AI-linked stocks added nearly US$300 billion in market cap. within minutes of Nvidia’s results.
▪️CEO Jensen Huang pushed back against “AI bubble” fears, asserting that demand remains structural.
▪️Nvidia temporarily became the world’s most valuable company, surpassing Apple and Microsoft.
▪️Investors interpreted the numbers as reinforcement of the AI revolution, though some analysts still warn of valuation excesses. 

Nvidia’s results underscore an uncomfortable truth: the AI cycle may be overhyped, but AI infrastructure demand is not. 

Nvidia’s performance validates the technology — and, looking at forward growth estimates, arguably even the valuations. Yet across the broader AI ecosystem, price-to-earnings and price-to-sales multiples remain aggressively stretched, echoing the late-1990s period when real technological progress collided with unrealistic expectations. 

For India, Nvidia’s boom is a powerful signal. Domestic datacentre and AI-enabling players — Netweb Technologies, E2E Networks, Black Box and Anant Raj — are structurally positioned to benefit from the global expansion in compute capacity. The AI bubble may eventually cool, but the build-out will not. 

When Valuations Outrun Reality
AI today stands at a crossroad. One path reflects genuine technological advancement — breakthroughs in NLP, robotics, scientific modelling, clinical diagnostics, cybersecurity and automation. The other path reflects speculative euphoria: valuations stretching far ahead of even the rosiest projections. 

History shows that technology cycles and valuation cycles rarely move together. Markets tend to overestimate short-term profitability and underestimate the long-term structural impact. AI is following that same trajectory. 

Lessons From the Dotcom Era
The closest parallel lies in the late 1990s. Dotcom companies were valued not on earnings but on imagination. They promised disruption, dominance and scale — but failed to deliver cash flows. 

When the bubble burst in 2000, trillions were wiped out. Yet the internet survived, strengthened, and reshaped every aspect of modern life. The danger lies not in AI itself but in the speed at which markets have priced in perfection. 

The Hidden Circularity of AI Revenues
Beneath the surface of AI-driven optimism lies a structural distortion: a closed-loop spending cycle within the AI ecosystem. Hyperscalers are spending billions on GPU infrastructure, which boosts revenues for chip makers. Chip makers supply the same hyperscalers and model developers. AI start-ups, funded by venture capital, spend heavily on cloud compute. Their spending boosts the earnings of cloud providers, who then raise capex again. The loop continues. 

This creates a self-reinforcing cycle where:
▪️Capex appears like demand.
▪️Demand appears like revenue.
▪️Revenue appears like exponential growth. 

No part of the cycle reflects diversified, broad-based enterprise consumption. Instead, it reflects the ecosystem feeding itself. 

It is not fraudulent — but it is unsustainable. 

Michael Burry’s Exit and the New Market Psychology 

Michael Burry, immortalised in The Big Short for predicting the 2008 housing crisis, did something remarkable in late 2025: he shut down Scion Asset Management. His rationale was telling. AI valuations, he said, had entered a zone “beyond his understanding,” and he believed hyperscalers were “artificially boosting each other’s earnings through mutual capex. 

His exit sparked a wave of introspection. Burry is known for spotting what others miss. When he steps back, markets pay attention. 

He was not the only voice of caution. Google’s CEO warned that no company was immune if an AI bubble burst. Sam Altman admitted AI markets were in a bubble. Analysts at Goldman Sachs, Reuters and BlackRock highlighted that valuation models were based more on belief than measurable productivity. When sentiment cracks at the top, tremors spread globally. 

How the AI Frenzy Triggered India’s Underperformance 

India became one of the worst-performing markets among major emerging economies in 2025. FPIs sold nearly `1.5 lakh crore in Indian equities. Yet, India’s macroeconomic indicators were healthy: GDP growth, domestic demand, inflation moderation and corporate earnings held firm. The reason for the underperformance lay not in India but in America. 

Indian IT bore the brunt of this exodus. Sentiment turned overwhelmingly negative as investors viewed Indian tech through a narrow lens: if India was not building foundational AI models, it was considered irrelevant to the revolution. 

FPIs consistently pulled money out of India in 2025, even during months when global AI stocks were rallying strongly. The few months when FPIs bought Indian equities coincided with sharp AI gains, but this trend did not last. Overall, the data suggests FPIs preferred shifting capital toward the booming AI opportunities in the U.S. rather than staying invested in India. 

The Slowdown in Indian IT: Perception vs. Reality
Quarter after quarter, Indian IT firms reported muted growth, cautious client spending, and delays in deal closures. Global BFSI, retail and telecom clients — traditional anchors of Indian IT — postponed large digital programs to explore AI-led transformation. 

Margins remained under pressure. Wage costs were elevated. Attrition eased but hiring stayed weak. Analysts expressed scepticism, often prematurely declaring the end of the Indian IT upcycle. 

But beneath this slowdown lies a developing structural opportunity. 

Indian IT is not disappearing. It is recalibrating for the next wave of global tech demand. 

Indian Large-Cap IT stocks as cautiously optimistic amid the AI noise. Leading firms like TCS, Infosys, HCL, Wipro, and Tech Mahindra are seen as transitioning from AI hype to strategically embedding AI and automation in client solutions, especially in BFSI, healthcare, and retail sectors. Despite challenges such as cautious client spending, margin pressures, and slower deal closure, these companies maintain stable growth driven by digital transformation and AI-driven productivity improvements. For Mid-Cap IT stocks, analysts see a more vibrant opportunity to leverage cloud, AI, and digital transformation due to their nimbleness and focus on emerging technologies. Companies like Affle India, Persistent Systems, Tejas Networks, and Zensar Technologies appear wellpositioned to benefit from AI tailwinds through specialized AI applications, ad-tech, and consulting services. Mid-caps offer a blend of scale and flexibility, often showing stronger AI-related deal wins and market traction compared to larger peers. 

Though more volatile, mid-caps are seen as the next growth drivers in Indian IT amid the AI transition phase. 

The Coming Capital Rotation: Why India Stands to Gain 

Every bubble eventually returns to equilibrium. When it does, global investors look for markets with:
▪️Stable earnings
▪️Reasonable valuations
▪️Demographic advantages
▪️Strong domestic demand
▪️Predictable policy environments 

India as the World’s AI Implementation Engine
India may not be competing with Silicon Valley in building foundational models — but it dominates the far larger, more profitable and more labour-intensive part of the AI value chain: implementation. 

Once AI moves from experimentation to enterprise-wide adoption, companies will require:
▪️Integration into legacy systems
▪️Data engineering
▪️Cybersecurity strengthening
▪️Workflow redesign
▪️Automation deployment
▪️AI model fine-tuning
▪️Cloud orchestration
▪️Compliance and governance engineering 

This is India’s home turf. 

The GCC ecosystem strengthens this position further. With over 1,900 GCCs operating in India — and projections of 2,500+ by 2030 — multinational corporations already depend on India for innovation, engineering and global decisionmaking. AI will accelerate this dependency. 

India will not be the world’s AI laboratory. It will be the world’s AI factory. 

Mid-Tier IT: The Sweet Spot in the Next Phase 

While large-cap IT firms remain weighed down by legacy contracts and slower digital transformation cycles, mid-tier IT is entering an advantageous lane. 

They are:
▪️Nimbler in adopting AI
▪️Specialised in cloud, cybersecurity and ER&D
▪️Competitively priced
▪️Deeply embedded in GCC workflows
▪️Agile in building niche capabilities 

As global enterprises shift from exploration to execution in AI, mid-tier firms are likely to capture more wallet share than before. Many are already showing stronger deal closures and more AI-related mandates than their large-cap peers. The next rally in Indian IT may be mid-cap led, not large-cap driven. 

The Global AI Bubble Debate Intensifies
The more the AI rally accelerated, the more global voices began calling out the excess. Analysts from Goldman Sachs, Reuters, the World Economic Forum, iShares, CNBC and Fortune all pointed to similar fault-lines: overstated earnings, unrealistic expectations, excessive capex and a lack of clarity around long-term margins. 

▪️AI is real.
▪️AI hype is inflated.
▪️And markets are beginning to acknowledge this gap. 

What Happens After the AI Bubble Cools Off
When a technology’s valuation bubble cools, history suggests three outcomes. 

First, capital rotates towards undervalued global markets. India stands to benefit significantly. 

Second, enterprise spending shifts from experimentation to operationalisation. This increases demand for integration, cybersecurity, workflow digitisation and data engineering — all strengths of India’s IT sector. 

Third, companies seek cost-efficient scaling models. AI is expensive. Energyintensive. Resourcehungry. When budgets tighten, India becomes the preferred engineering hub. 

The second wave of AI will not be about building models but about deploying them. The biggest winners in this phase are not model creators but implementation specialists — a role India is primed to lead. 

The Investment Implications for Indian Markets
Indian IT today sits at a curious intersection. Valuations are compressed. Sentiment is subdued. Investors are sceptical. Yet, the industry is positioned to benefit from the next decade of global technology transformation. 

The near-term caution around Indian IT may be justified, but the long-term opportunity is unmistakable. As global AI exuberance cools, India’s role will evolve from peripheral observer to essential partner. 

And when global growth stabilises, Indian markets — especially mid-tier IT — could lead the next sustained upcycle. 

The Reality Check That Could Reshape Global Tech 
Artificial intelligence will define the next decade. That is not in doubt. 

But markets must navigate the uncomfortable transition from hype to reality — from inflated valuations to sustainable business models, from narrative-driven rallies to implementation-driven profitability. 

AI’s valuation bubble will burst. AI’s technological wave will rise. And India will stand at the heart of the second phase — the real-world execution phase. 

When price meets value again, Indian IT will no longer be an underperformer. 

It will be a rediscovered powerhouse. 

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