AI capex boom: 3 crash scenarios and India risks 2026

Why the AI capex boom debate is back

The global rally linked to artificial intelligence is again being framed through downside scenarios rather than upside narratives. One risk model outlined three possible endings for the AI capex boom: a mild correction, a normal recessionary downturn, and a full TMT-style bust. The same discussion also highlighted why a sell-off can coexist with a “buy the dip” view, depending on the trigger and the time horizon.

Across markets, the near-term focus has shifted to valuation sensitivity, rate levels, and the concentration of returns in a narrow set of AI-linked stocks. India sits in an unusual position in that debate: it is repeatedly named as one of the markets where the “AI bubble” is concentrated, yet it is also described as having restricted direct AI access that can limit some downside.

Three possible endings: correction, recession, or TMT-style bust

In the first scenario, the boom cleans out short-term excess and drops 4.5% before recovering. The estimate attached to that scenario is that the US stock market would enter a correction, with a drawdown of around 15%. Europe, meanwhile, would likely fall more than 20% and enter a new bear market.

In the second scenario, described as a typical tech-driven recession, investment drops 6%. Under that setup, both the US and Europe would likely enter recession, which could compound equity selling. The implied market impact was a drop of more than 20% in the US and more than 30% in Europe.

In the third scenario, a full TMT-style crash, drawdowns could exceed 50%. The logic is not that this outcome is the base case, but that it remains a tail risk worth modelling because positioning and valuations can amplify moves when expectations reverse.

What the latest sell-off data points are signalling

One market snapshot cited a sharp risk-off move: the Dow Jones was down about 1.3%, the VIX was up about “30 odd percent”, the S&P 500 was down 2.6%, and the Nasdaq was down 4.2%. The commentary tied the weakness mainly to the semiconductor chip AI trade, alongside what was described as a “wall of supply” coming into markets.

Rates were also flagged as a key variable to watch, focusing on the 10-year Treasury yield and adding the 30-year as well. The cited risk marker was whether yields “keep sustaining above 5.5.1”, described as “trouble” for markets.

Another cited trigger was a hot jobs report, suggesting macro data can quickly change the interest-rate path that high-multiple AI stocks depend on.

AI-led layoffs are rising and showing up in the data

Job cuts were described as rising, with AI listed as the most cited reason for layoffs. AI accounted for about 40% of total job cuts in May in the referenced dataset. AI-driven job cuts were put at 88,000 this year, already about 60% higher than all of 2025.

The same set of remarks added that the first five months of 2026 have already seen 60% more AI layoffs than all 12 months of 2025. For investors, the takeaway is not a direct earnings conclusion from a single dataset, but that labour-market headlines can shift sentiment quickly, especially when AI is both the growth story and the disruption story.

India’s relative performance gap versus emerging markets

A separate performance comparison highlighted how uneven the global tape has been. Emerging markets year to date were said to be up 25% in USD terms, while the United States was 11% and world markets were 11%. India, by contrast, was cited at minus 11.2%.

It was also noted that about 85% of emerging markets had beaten India, and that in 2026 that number was 90%, comparable to what was seen in 2011. This framing matters because a global AI risk-off move can hit India through foreign flows and sentiment even when the initial shock is in US mega-cap tech.

How strategists are framing India: rotation, drawdowns, and resets

By late 2025, leading institutions were warning about the need for caution, noting a temporary drop in AI-exposed stocks after an overstretched valuation run. That period was described as prompting rotation into defensive names such as utilities and consumer staples.

Within this framework, a base case was outlined as “sideways to modestly positive” index returns, driven by sector rotation, with IT consolidating while cyclicals and defensives offset each other. A bearish “risk case” suggested a bigger global AI correction could lead to a 5% to 7% drawdown in India, with an opportunity in quality leaders if valuations reset.

The same view argued the cooldown in AI stock mania would be a rational reset rather than a structural break, and that “a deep correction isn’t the base case,” though a mild pullback is feasible if global risk aversion rises.

RBI flags valuation and concentration risks in AI-linked assets

The Reserve Bank of India, in its Financial Stability Report, cautioned that elevated valuations in AI-linked assets and growing concentration in equity markets have increased the likelihood of sharp price corrections. The FSR also said the probability of outsized price declines has risen, leaving markets vulnerable if expectations around AI’s long-term impact weaken.

This is a broad stability warning rather than a market call. But it reinforces a key point for India-facing investors: even if domestic fundamentals are supportive, global repricing can still occur when positioning becomes crowded.

Bullish voices still see dips as tactical opportunities

Not everyone is positioning for a large drawdown. One market participant argued that “right now, it is absolutely a tactical buying opportunity” in AI stocks, while acknowledging there are risks “that could derail the boom.” The same view held that rising odds of a negative outcome do not make it a “done deal,” and suggested that panic selling can create entry points.

Akshat Shrivastava, a hedge fund manager, also expressed a skewed probability view. He said there is a chance of a “50% correction,” but an “even bigger chance of a 150% rise” in the US market, warning that waiting for the bubble to burst could mean missing further upside.

Michael Yoshikami of Destination Wealth Management, however, cautioned that the current rally propelled by AI is likely to face a downturn, underscoring how divided expectations remain.

Key numbers at a glance

Market impact and why it matters for Indian investors

The core market risk outlined is that a shift in AI capex expectations can drive sharp equity repricing, especially where valuations are stretched and leadership is narrow. If the correction path plays out, India’s stated downside in one risk case is 5% to 7%, but the broader global scenarios show that the US and Europe could see much larger drawdowns under recessionary or bust outcomes.

At the same time, India’s role in the AI narrative is not limited to listed IT. The story is also about infrastructure buildout and the possibility, raised by one investment firm, that India could move from being an observer to an “AI powerhouse,” using data resources and infrastructure development to fuel a new growth phase. That longer-term framing does not remove drawdown risk, but it helps explain why investors keep returning to the theme after sell-offs.

Conclusion: scenario planning, not one-way bets

The inputs laid out point to a market that is trying to price both boom continuation and boom fragility. Scenario analysis ranges from a mild clean-out to a recessionary downturn to a TMT-style crash with drawdowns exceeding 50%. In India, strategists have framed the base case as sideways to modestly positive returns with rotation, while acknowledging a 5% to 7% drawdown risk if global AI correction intensifies.

The next signals to watch, based on the same discussion, are macro data surprises, the rate level highlighted in US Treasuries, and whether AI-linked sentiment deteriorates further amid rising layoff headlines and RBI warnings on valuation and concentration risk.