There is a correlation between hardware and AAA's obsession with graphical fidelity but it's not quite the one you'd think. Does better graphics hardware enable devs to chase photorealism more? Yes. Do some of them do so thoughtlessly? Yes. But also: consider who's investing the most in this.
It's the people who profit from selling a lot of that hardware. Sony and Microsoft et al, yes, but also Nvidia and AMD. These companies all actively push developers, esp at the high end of the expense range, to realism up their shit, and support the ones who do financially and with dev resources. You may not know this if you don't come from AAA but nvidia often works directly with developers to help optimize their games. They don't do this out of the goodness of their heart. They do it because to them, hyper expensive photorealism is a marketing platform. Every time a game comes out that needs the latest console or top tier specs in your computer to run, that's money for nvidia, sony etc. It's directly correlated with profit for them and that's why they've invested so much over so many years to tie realism to "new/good" in gamers' minds. None of this is an accident. It's an intentionally manufactured cultural attitude.
Beyond that, It's worth noting that because of the above money and culture, many, if not most, industry tools prioritize photorealism and high-fidelity and offer both better and easier tooling if that's what you're shooting for. It's very easy especially for indies in the modern era to get stuck in situations where they try these tools out and the results look immediately great and then 3 years later they're stuck with an art style that's 10x more expensive than it has to be. This kind of easy-entry high fidelity is IMO viewed as a significant part of unreal et al's selling points and the focus on it drives more indies in that aesthetic direction because doing anything else is functionally swimming against the current.
This all said, I don't think that means 'more powerful computers = more expensive games' was ever a given. I think the fundamental problem is that the industry was shaped by a desire to make that correlation true, by companies that profit by it being true, and now everyone has to deal with the consequences. Indie devs who choose not to partake in the fidelity-chase ecosystem still have to deal with trying to stand out in a field full of those who do, and many publishers - who mostly only care about "how does your trailer look/how do your screenshots look" - are going to pick who they fund based on these kinds of choices.
This is not to say it's not possible to make a striking-looking game without going super hard on fidelity, we see this literally every year. BUT I think it's worth noting the degree to which doing so means intentionally pushing back on basically everything the industry wants and that it provides, from the ground-up. That's hard to get the momentum for in many cases. It requires art skills that often are less common because art schools train with AAA in mind. It's a weird situation!
Anyway, that's my thoughts on the subject.
from my experience, the other reason that there's a push towards photorealism from people like nvidia is that that's what both the academics and movie industry are most interested in from a technical standpoint. the film industry wants stuff that can blend in with real life actors and that requires some pretty high standards, and the graphics academics, bless em but creative expression is very rarely what they're after.
nvidia doesn't just have its hands in the video game pie, they also directly sponsor and work with people in comp sci graphics departments as well as people involved in all sorts of film industry positions (my first job out of uni was working on a particle system plugin for 3DS Max and even at a small company nvidia readily forked over some very expensive hardware).
so of course it makes sense for them to take the same tactic pushing the same tech in multiple fields rather than trying to split their focus