Sensex, Nifty: AI behind stock market's muted show, foreign outflows?

If you think artificial intelligence (AI) is after your job, think again. It might be hurting your stock market returns too. Kotak Institutional Equities said the exponential growth in market capitalisation of AI-related stocks in major developed and select emerging markets has been the key driver behind their recent large outperformance versus the rest of the world. The negligible presence of India in the AI-value chain and high share of ‘traditional’ sectors in the Indian market may result in the Indian market being shunned by global investors until the AI excitement moderates, it warned.

Data showed foreign portfolio investors have sold Rs 1.40 lakh crore worth of domestic shares in 2025 so far.  Kotak said India may not benefit much from an increase in foreign flows of risk capital. The lack of integration of India in the global-AI value chain and high valuations for most sectors and stocks in India have resulted in India being a natural funding market for AI-theme-driven global capital flows. India’s best hope to regain interest from global risk capital could be a deflation of the AI bubble, it said.

It said most observers agree about a bubble but there is no consensus on the duration and magnitude or even the nature of the bubble. Nonetheless, a sharp decline in the global cost of capital may still favor select Indian companies, which are currently delivering high growth but are generating low cashflows, it said.

A sharp surge in the market capitalisation of global technology giants — fuelled by aggressive investments in AI computing infrastructure — has led AI-linked stocks and AI-heavy markets to decisively outperform major global indices. Kotak Institutional Equities noted that leading AI-focused companies across the US, China, Japan, South Korea and Taiwan have contributed between 14 per cent and 58 per cent of incremental market capitalisation in their respective markets over the past three years. Meanwhile, fresh AI-related announcements and subsequent stock rallies indicate that the “AI trade” continues to dominate global investor sentiment.

The sharp increase in the market cap of global technology stocks, primarily driven by their exponential spending on AI-related computing power, has resulted in the AI-related stocks and AI-heavy markets outperforming global indices. The major AI-related listed companies in the US (Nvidia Corp, Microsoft), China (Tencent Holdings, Alibaba), Japan (Toyota Motor Corp, Softbank Group Corp), South Korea (Samsung Electronics, SK Hynix Inc) and Taiwan (Taiwan Semiconductor, Hon Hai Precision Industry) contributed 14-58 per cent of the incremental market cap of these countries over the past three years.

“The recent announcements of AI-related stocks and consequent increase in stock prices suggest that global markets continue to chase the narrative. Market cap of India continues to be dominated by ‘traditional’ industries. Our analysis of the market cap of top-25 Indian stocks over the past three years shows that the Indian market continues to be dominated by traditional (or even sunset) sectors,” Kotak said.

The domestic brokerage said that most of these Indian companies have delivered modest revenue/moderate PAT growth over the past three years, even as they continue to enjoy elevated multiples. The market’s expectation of Indian stocks appears to be driven solely by expectations of industry growth led by per capita income growth.

“The ongoing decline in global cost of capital may continue to benefit AI-theme The recent cut in US Federal Fund rates, with expectations of a 50 bps cut in interest rates over the next 12 months (see Exhibits 10-11), is likely to reduce the global cost of capital over this period. This could sustain the market’s faith in the AI narrative and allow global risk capital to continue to take an expansive view of (1) the large investment into computing power by AI-related companies and (2) the low cashflow generation of AI-related stocks,” Kotak said.