Is AI Trade Losing Steam? Why India's Stock Market Is Suddenly Back In Favour

For much of the past year, India was viewed as the "anti-AI trade" among global investors. While semiconductor-driven markets such as South Korea and Taiwan surged on the back of artificial intelligence (AI) optimism, Indian equities struggled with expensive valuations, persistent foreign outflows and the absence of listed companies directly benefiting from the AI hardware boom.

That narrative, however, has begun to shift. Over the past month, the Nifty has risen 3.3%, outperforming the Nasdaq, which has slipped 3%, and Taiwan, where gains have moderated to 1.2%. The sharpest reversal has come from South Korea, where the Kospi has corrected 13% over the same period after emerging as one of the biggest beneficiaries of the global AI rally earlier this year.

The improving relative performance is also being reflected in capital flows. Foreign institutional investors (FIIs), who had been persistent sellers of Indian equities for much of the year, turned net buyers of around ₹7,000 crore between June 15 and July 1, according to Sebi cash market data. At the same time, investors have begun trimming exposure to AI-heavy semiconductor markets such as South Korea, where FIIs have remained net sellers despite the market's strong gains earlier in the year.

The changing market leadership raises an important question: Is global capital beginning to rotate away from the AI trade towards broader emerging markets like India, or is this simply a temporary pause after an overheated rally in semiconductor stocks?

Why India Is Back On Investors' Radar

Several factors have combined to improve sentiment towards Indian equities in recent weeks. Perhaps the biggest tailwind has been the sharp decline in crude oil prices, with Brent crude now hovering around $70 a barrel. As one of the world's largest crude importers, India stands to benefit disproportionately from lower energy prices through reduced inflation, an improving current account deficit and stronger corporate profitability.

At the same time, Indian equities have become relatively more attractive after months of underperformance. Unlike South Korea and Taiwan, where benchmark returns have become increasingly concentrated in a handful of semiconductor companies, India's market offers a broader mix of financials, consumer businesses, industrials, capital goods and domestic consumption plays. That diversification has started attracting investors looking to reduce exposure to crowded AI trades.

The shift has also coincided with improving foreign investor sentiment. After months of heavy selling, overseas investors have returned to Indian equities, suggesting that macroeconomic stability, resilient domestic demand and easing commodity prices are beginning to outweigh earlier concerns over expensive valuations.

However, analysts caution against interpreting the recent outperformance as the beginning of a sustained leadership change. Santosh Meena, Head of Research at Swastika Investmart, believes India's resilience represents "a short-term rotation rather than the start of a durable leadership shift." According to him, the move reflects mean reversion after AI and semiconductor stocks became overheated, combined with India's improving macroeconomic backdrop, domestic inflows and more reasonable valuations. While India's long-term structural growth story remains intact, he notes that the country still lacks the direct semiconductor exposure that has powered global AI leaders.

Has The AI Trade Finally Started Cooling?

The recent weakness in AI-linked markets has also revived debate over whether one of the strongest investment themes of recent years is beginning to lose momentum. Global brokerages increasingly believe the risks surrounding AI are shifting from technology adoption towards the economics of the enormous capital expenditure required to sustain it.

Macquarie recently argued that the AI investment cycle is unlikely to end through a dramatic collapse similar to previous technology bubbles. Instead, the brokerage expects the current boom to gradually deflate through a series of "rolling bubbles," where different parts of the AI ecosystem experience periods of rapid appreciation followed by corrections. While describing the current AI cycle as historically significant, Macquarie warned that the concentration of capital into a narrow group of companies leaves markets vulnerable to sharp sentiment reversals.

Jefferies' Global Head of Equity Strategy, Chris Wood, shares a similar concern but approaches it from a different angle. Rather than questioning demand for AI itself, Wood argues that the bigger risk lies in whether hyperscalers and AI laboratories will eventually generate adequate returns on the unprecedented amounts of capital they are deploying. He has cautioned that concerns over "malinvestment" could eventually trigger a prolonged pause in the AI trade as investors begin questioning whether the industry's spending can be commercially justified.

Wood also highlighted the increasingly interconnected nature of AI funding, pointing to examples where companies financing AI infrastructure also become customers within the same ecosystem. Such arrangements, he argues, remain sustainable only as long as investors continue financing the broader AI buildout. Once confidence weakens, those feedback loops could unwind rapidly, placing pressure on the semiconductor companies that have led global markets higher over the past year.

India's Contrarian Opportunity Lies In Diversification

The changing market dynamics are also reflected in a recent report by DSP Netra, which argues that India's relative underperformance has quietly created one of the more compelling contrarian opportunities within emerging markets.

According to the report, the MSCI Emerging Markets Index has returned to levels last seen in 2021, but much of the rally has been driven by an increasingly narrow group of companies rather than broad-based market participation. Technology's weight within the benchmark jumped from 28.3% in December 2025 to 44.2% by May 2026, while sectors such as communication services, healthcare and consumer cyclicals lost significant representation.

Even more striking is the concentration of returns. DSP estimates that around 72% of the MSCI Emerging Markets Index's gains this year have come from just three semiconductor companies - Taiwan Semiconductor Manufacturing Company (TSMC), Samsung Electronics and SK Hynix. Together, those companies now account for roughly 30% of the benchmark and have contributed nearly 18 percentage points of its overall return.

Such concentration, DSP argues, leaves the benchmark increasingly exposed to any moderation in enthusiasm towards AI and semiconductor stocks. By contrast, India remains one of the few major emerging markets trading close to its long-term valuation averages. While Taiwan and South Korea trade at premiums of more than 85% and 71% to their historical valuation multiples, respectively, India currently trades at a slight discount to its own long-term average, despite retaining relatively stronger macroeconomic fundamentals.

Rotation Rather Than A New Market Regime

Most market participants therefore view the recent shift as portfolio rotation rather than the beginning of a new investment cycle. Vinit Bolinjkar, Head of Research at Ventura, believes investors are simply taking profits in crowded AI-linked markets after a prolonged rally and reallocating capital towards diversified markets with relatively stronger macroeconomic stability and earnings visibility.

According to Bolinjkar, India is benefiting from lower crude prices, resilient domestic flows, improving FII participation and stronger visibility across sectors such as banking, consumption and capital goods. However, he cautions that this should not be interpreted as the end of the global AI investment theme. Instead, the market appears to be broadening beyond a handful of semiconductor winners towards reasonably valued economies capable of delivering more balanced earnings growth.

Ashwini Shami, President and Portfolio Manager at OmniScience Capital, also argues that the structural AI story remains firmly intact. In his view, AI will continue to be one of the world's most important long-term growth drivers, supported by substantial investment and expanding business adoption across industries. What is changing, however, is the relationship between growth expectations and valuations. As AI-related stocks become fully priced, investors are increasingly searching for opportunities in sectors and markets offering multiple growth drivers beyond artificial intelligence alone.

For India, Shami believes those opportunities extend beyond traditional IT services into data centre infrastructure, power, domestic consumption and capital expenditure. Combined with resilient corporate earnings and improving macroeconomic conditions, these factors could allow India to attract incremental global capital even as AI remains a dominant long-term investment theme.

For investors, the coming months will provide greater clarity on whether the recent outperformance evolves into something more durable. Meena says key indicators to monitor include corporate earnings upgrades, the sustainability of foreign institutional inflows, relative valuations, crude oil prices, rupee stability and the trajectory of global AI investment.

If India's macroeconomic resilience continues while AI-heavy markets experience further valuation consolidation, the recent rotation could extend. For now, however, analysts largely agree that India is benefiting from a healthy diversification of global capital rather than replacing artificial intelligence as the world's defining investment theme.