The global investment landscape, dominated by artificial intelligence euphoria in the United States, may be poised for a significant shift in 2026. According to Ruchir Sharma, Chairman of Rockefeller International, the AI-driven market surge shows classic signs of a bubble. As this mania potentially wanes, the resulting economic tremors could impact the world's two superpowers, the US and China, creating a complex set of opportunities and challenges for India.
The Looming End of the AI Bubble and a Shift in Capital Flows
Sharma's analysis indicates the AI-led US market is now overvalued, overinvested, overleveraged, and over-owned. A critical signal is that American households now hold more wealth in stocks than in property, a unique situation among major economies. In contrast, Indian households typically keep about 50% of their wealth in real estate and only 7% in stocks.
History suggests such bubbles don't collapse spontaneously. They typically deflate when central banks tighten monetary policy, reducing the liquidity that fuels speculation. The risk for the AI bubble in 2026 isn't just the Federal Reserve raising short-term rates. A spike in long-term interest rates, perhaps due to fading confidence in the US or slowing capital inflows, could also pop the bubble.
This presents a potential opening for India. The Indian stock market was seen as an 'AI desert' in 2025, suffering major foreign outflows partly because its research and development spending has fallen to under 0.7% of GDP. However, as the AI frenzy cools and investors seek new opportunities, India could attract fresh capital in the coming year.
Affordability Crises and the Global Rate Risk
Simmering affordability crises in major economies add another layer of risk. In the US, prices for essentials like electricity (up 40% in five years), groceries, and housing (both up 30%) are fueling political pressure. With the 2026 midterms approaching, the Trump administration's talk of relief checks and potential tax cuts could worsen the budget deficit, already projected to rise above 6% of GDP. This threatens to push up long-term interest rates in the world's most financialized economy.
India faces its own acute housing affordability issue, with the average home price in Mumbai now 15 times the annual household income—higher than any major US city. However, India's macroeconomic risks appear more contained. The central government's deficit is declining, making a severe bond market backlash less likely than in the US, though rising state deficits remain a concern.
India's Position in a Changing World Order
The global financial system's dependence on the US is striking. In 2025, foreign inflows of $1.7 trillion financed the entire US current account deficit. A loss of confidence could weaken the dollar, a scenario historically linked to stronger returns in international markets. America's share of the global stock index has already dipped from 66% at end-2024 to 64%, yet this still dwarfs its 28% share of the global economy—an imbalance that may correct.
India, with a 3.5% share of the global economy but only 1.6% of the global stock index, is well-positioned to gain from any reallocation of funds. This potential is bolstered by a powerful domestic investor base. In 2025, despite a near-record $19 billion in net foreign outflows, Indian markets gained a record $90 billion in net domestic flows, showcasing a growing equity culture.
Fundamentals are also turning favorable. After lagging for 15 years, corporate earnings growth in international markets now matches the US, with emerging markets leading. India's per capita GDP is expected to grow nearly four times faster than America's in the coming years, a strong tailwind for its stocks.
Specific Opportunities and Challenges for India
Sharma identifies a 'sweet spot' in undervalued quality stocks—companies with high returns on equity and solid earnings trading below their long-term value. India is a hotbed for such companies, with 24 stocks in this category valued above $1 billion, concentrated in banking and materials. This core could help pull foreign investment back in 2026.
However, significant challenges persist. China's strategy of boosting exports by slashing prices and managing its currency—'China dumping'—is hollowing out manufacturing worldwide. India has been hit hard, with manufacturing's share of GDP falling to just 14% from over 16% in the late 2010s. While India has launched anti-dumping investigations and imposed duties in some sectors, it also seeks to repair ties with China to secure crucial imports like electronic components.
Furthermore, a global crackdown on immigration is shrinking workforces in the West, which could increase labor costs and inflation. Defying this trend, India is experiencing a mass exodus, with an average of 675,000 people emigrating annually this decade, driven by weak job growth at home and opportunities abroad, particularly in Gulf construction booms.
In a world where AI mania may fade, US exceptionalism is questioned, and China doubles down on exports, India's path in 2026 hinges on leveraging its domestic investor strength, navigating global trade tensions, and capitalizing on its growth premium while managing internal affordability pressures.
