Explained: Will the global selling in AI stocks hit Indian stock markets?

The recent correction in AI-related stocks may not suggest the end of the tech boom, but it may signal a shift toward more cautious investing, according to analysts

After months of euphoria, the artificial intelligence (AI) trade showed signs of fatigue this week when tech stocks fell hard in Asia and the US. 

Overnight, in the US, shares of major AI companies weighed on the broader markets with Nvidia, Microsoft, Palantir Technologies, Broadcom, and Advanced Micro Devices logging steep losses.

 

Nearer home, Japan's benchmark Nikkei 225 index tumbled 2.03 per cent this morning with shares of AI-related stocks being the key drags. SoftBank shares fell over 8 per cent, semiconductor testing equipment maker Advantest lost more than 7 per cent, chipmaker Renesas Electronics fell 4 per cent, and Tokyo Electron, a chip production equipment maker, declined 2.17 per cent.

 

 

At the headline level, the Bloomberg AI Index has corrected about 4 per cent from its peak, following an eye-popping 34 per cent rally over the last three months, according to Kotak Institutional Equities’ latest sector report.

 

While some investors view this as a long-overdue breather, others fear it may be the first crack in what could be an AI bubble.

 

"The correction in global markets and AI stocks in the past few days may or may not mark the end of the AI bubble. Whether it will be good, bad or ugly, only time will tell," it noted.

 

Why are AI stocks falling?

According to Kotak Institutional Equities report, titled 'AI: Bubble, trouble?', the correction comes amid growing concerns that the market may have run too far ahead of fundamentals. The brokerage notes that the massive surge in AI-related market capitalisations globally - from chipmakers to software firms - implies "mind-boggling" levels of revenue and profit expectations that may be difficult to justify.

 

Consider this: OpenAI, the poster boy of the AI revolution, has attracted $1–1.5 trillion in committed investments. For such investments to deliver a reasonable return, the company would need annual revenues of $200–250 billion, assuming that up to one billion users pay $20 per month.

 

Yet, OpenAI currently has only around 40 million paying subscribers, underscoring the gap between market hopes and real-world economics, the report pointed out.

 

Notably, OpenAI expects to reach $the 100-billion revenue mark by 2027.

 

"This mismatch has prompted investors to reassess valuations, especially as rising interest rates and higher capital costs make future profits less attractive. The result: a quick but sharp correction across global AI-heavy markets such as the US, China, South Korea, and Taiwan—where AI-linked companies have dominated recent market cap gains," it said.  In an earliar report, Kotak Institutional had highlighted that AI-related firms in the US, China, Japan, South Korea, and Taiwan contributed between 14 per cent and 58 per cent of the incremental market capitalisation in their respective markets over the past three years.

 

The Bloomberg AI Index, which tracks global AI-related companies, is now the second-largest equity market index in the world after the US, with a total market cap of $25 trillion. It is ahead of China ($13 trillion), Japan ($8 trillion), and India ($3 trillion).  Further, the Bloomberg AI index has advanced 48 per cent in the last one year, and 67 per cent in the last six months, underscoring the frenzy around AI computing, semiconductors, and infrastructure stocks.

 

Is the AI Bubble bursting?

Kotak Institutional Equities fell short of calling the recent correction in AI stocks the end of the 'AI bubble', admitting that “the implied revenue and profit pools of AI companies are hard to reconcile with the limited ability of humans to pay for such services.

 

While the sector continues to hold transformative long-term potential, the near-term narrative is shifting toward realism, it noted.

 

India: The 'anti-AI' play?

In this backdrop, Kotak Institutional Equities positions India as a “relative safe haven” in this global AI correction. The Indian equity market, represented by the MSCI India Index, is up just 6 per cent this year - well below the 30 per cent rise in the emerging markets and 17 per cent in developed markets. The report attributes this underperformance partly to India’s lack of pure AI plays.

 

For Indian investors, this means the country’s market could be insulated from volatility tied to global AI valuations.

 

"Instead, domestic sectors such as financials, industrials, and consumer goods - anchored in traditional demand - continue to drive earnings. We forecast Nifty profits to grow 10.7 per cent in FY26 and 16.2 per cent in FY27, with valuations expected to moderate to 19.9x forward earnings by FY27," it said.

 

Road ahead for AI stocks

While the AI correction may not yet spell the end of the tech boom, it does signal a shift toward more cautious, data-backed investing. Analysts expect investors to differentiate between companies with sustainable AI applications and those simply riding the hype wave.

 

For India, this phase could reaffirm its position as a steady compounder amid global volatility. The absence of frothy AI valuations, coupled with consistent economic growth and earnings stability, might make Indian equities more attractive to global investors seeking balance in an overheated AI world.