Reflections from the road: On India, the mood remains sombre, even bleak

I recently had the opportunity to spend some time in the United States (US), meeting with the chief executive officers of several large companies and interacting with other global investors. It was an interesting time to be in the US, given the Iran war, the AI boom, and surging equity markets.

 

Some of the key takeaways from my meetings are as follows:

 

The surge in artificial intelligence (AI) spending is real, and it is all anyone can talk about. I don’t think I have seen a corporate investment boom of this magnitude in my investing lifetime. The five main hyperscalers will spend over $700 billion on AI capital expenditure in 2026. This figure is seven times higher than it was when ChatGPT was released. What’s more, spending is expected to exceed $800 billion in 2027.

 

If we include the spending incurred by the whole ecosystem (power capacity, chip fabrication plants, etc), it crosses $1 trillion in the US alone. Such is the scale of capital spending that even the most profitable and cash-generative businesses in the world can no longer support this level of spending from organic cash flows. Witness the $85 billion equity raise by Alphabet, with Meta next in line. The hyperscalers are now also accounting for 15-20 per cent of corporate debt issuance. AI is now a race only between China and the US; nobody else can compete. This quantum of capital spending for one theme is unprecedented, and it is now the driver of total US growth, accounting for over 60 per cent of incremental gross domestic product (GDP).

 

When we see such a level of growth and absolute quantum of capital spending, it will normally supercharge corporate earnings. The companies selling the equipment book profits upfront, while those buying the equipment amortise the costs over time. This timing mismatch supercharges corporate earnings. We are seeing the same phenomenon in the US today.

 

For the first quarter of 2026, S&P 500 earnings (ex-energy) rose over 21 per cent, with corporate margins reaching an all-time high of 15.5 per cent (profit before tax). Each new dollar of sales generated 32 cents of pre-tax profits. Two-thirds of the companies saw their margins rise. While there is some impact from productivity gains in this margin expansion, with technology sector headcount down by 5 per cent over the last four years, strength in capex is, to my mind, the main driver of the earnings windfall. The 68 companies that are direct AI plays (as defined by various banks) delivered two-thirds of the earnings gain and, as a group, reported earnings growth of 52 per cent in Q1 on a 29 per cent rise in revenues. The remaining 432 companies reported earnings growth of 10 per cent — still strong for an economy with nominal GDP growth of 6 per cent — but it pales in comparison.

 

CEOs were visibly confident about continued margin expansion. The productivity benefits of AI investments are yet to kick in. AI tools are only now penetrating deep into enterprises and changing workflows and releasing headcount.  This is the real reason the US market looks Teflon-coated. With earnings growing at 21 per cent and accelerating every quarter, there is strong earnings support.

 

The sense of excitement and infinite possibilities are visible in every interaction with corporate America, public investors, and venture capitalists. There has been so much wealth creation that capital is available for even the wildest ideas.

 

There are, however, also clear danger signs. Since the Iran war, the only sector that is working is technology, and within that, the semiconductor and hardware names. They account for all the returns over the last three months. This phenomenon is global; just look at market performance in North Asia, only semiconductor equities are delivering the returns.

 

The returns are so narrow that, to keep up, funds are being forced to sell almost everything else and just pile into the semiconductor names. They have no chance of outperformance otherwise. For the first time, even emerging market (EM) funds have been buying Nvidia and global semiconductor stocks. This is classic late cycle behaviour — momentum chasing that will end badly. Basically everyone is up to their necks in this AI stuff. Most investors do not appreciate just how intertwined earnings are with the AI investment cycle. When the AI cycle moderates, earnings will be cut savagely. There also seems to be a worrying frenzy developing around the three upcoming listings of Space-X, Anthropic, and OpenAI. These will be the three biggest IPOs of all time, occurring within months of each other, and will raise over $175 billion. At listing, the expected value of all three companies will be almost $4 trillion. Most market tops are created by a marquee listing at nosebleed valuations. We are going to have three in quick succession!

 

On India, the mood remains sombre, even bleak. Zero interest. Even 6,000 basis points of underperformance versus EM equities over the last 12 months has failed to stir interest. India has now underperformed EM equities even over a 10-year horizon. Nobody seemed to care that TSMC alone carries a higher index weight than India in the EM index. At the moment, nobody can go against the AI trade — it is career risk.

 

Why does India get such a valuation premium over EM equities? This was a question many asked. On growth, return on equity (RoE), scale of profits, and long-term performance, it does not stand out from the EM pack, so why the premium? Nobody wants to hear the argument that the sales and profits earned by TSMC, SK Hynix, and Samsung Electronics are at cyclical peaks; you must look at normalised numbers. Believers in the AI trade see these earnings levels as the new normal for these companies and countries.

 

India is not cheap enough for value investors, and lacks enough growth to attract growth investors. We are seen as the biggest loser of the AI boom, given our reliance on white-collar service exports. From being rock solid, the macro picture —be it the current account, fiscal or even inflation — is deteriorating for all indicators.

 

The weakness of the rupee has scared many. The irritation and complexity of capital gains taxes for foreign portfolio investors have been well-flagged. India seems to be absent from any discussion on cutting-edge technologies. Most global investors expect India to simply tread water and drift as we slowly grow into our valuations. There is absolutely no sign of substantial equity flows anytime soon.

 

Most investors no longer take it as a given that India can grow at a minimum of 6 per cent for at least a decade. There is much more debate about our true structural growth outlook, with many investors believing that our best years of growth are behind us. The world cannot accommodate India gaining a serious share in global manufacturing. There were questions about the demographic dividend turning into a disaster if we cannot create enough jobs. All in all, it was a sobering set of discussions and a good reality check.

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The author is with Amansa Capital