I think the problem a lot of studios are finding themselves stuck in, is that they think bigger, prettier games, nearly always yields a better result, a bigger return on the investment. When this just isn't the case, especially when the extra costs involved in producing the game are passed on to the customer, with a lot of new games costing £70+ and people often having less disposable income now, less time to sit down and enjoy their hobby. This means people are just a lot more selective about what they buy, but at the same time, if games started to look simpler, were smaller, a portion of the fanbase would then kick off.
Are Nintendo at more of a sweet spot? Maybe a little? I still think the Switch needs an upgrade for some titles, but we have still got some visually amazing games on the system, Mario Odyssey, both Zelda games, MP Remaster to name a handful, if we still got older style, Pokemon games in a Pokemon version of the 2D HD style we've seen in Octopath Traveller, I'd probably not be as desperate for a Switch 2 in this case, but this feels like the developers aren't being given the time rather than the hardware being the only bottle neck.
There does also come a point, from a graphical point of view where it does feel like diminishing returns, new hardware is inevitable though, but I can see why some companies want to get as much as possible out of one piece before moving on. I still don't get why Sony and Microsoft seem intent on releasing new hardware again though, with cross gen still being such a factor (especially for PS4), both would be better to just focus on their current 'new' consoles for a good few years before releasing new hardware, again. Really poor of Sony to lay off nearly a thousand staff and then still expect folk to cough up for a PS5 Pro