Honestly, a lot of the complaints about the generational leap in power this gen are nothing new. People were talking about "diminishing returns" over a decade ago during the transition to Gen 7, and I remember seeing a bunch of complaints early last gen about the games not looking too much better than 6th-gen games. Hell, I remember not being that impressed by what I saw of the launch window games for the PS2 I saw back in late 2000/early 2001, though considering what I saw on the GC, Xbox, and even the much weaker Dreamcast, that obviously could be chalked up to the developers simply not making good use of the PS2's capabilities.
But aside from those early PS2 games, I remember seeing games like Soul Calibur, Rogue Squadron II, and Halo CE and thinking they blew away everything I saw on the N64 and PS1. The first time I saw the 360's games in action back in late '05, I immediately noticed how much better they looked than anything on any prior system, even a game like Halo 2 that pushed the OXbox to its limits. And this generation, there are many games that make even the best-looking last-gen games look primitive by comparison. I dare anyone to look at games like Battlefront, Driveclub, Uncharted 4, and Gears 4 and say it isn't a huge jump.
However, while talk of diminishing returns in game graphics have always been highly exaggerated, it is not without basis. The rate of increase in computing power over the past 20 years has slowed down considerably. The PS3's GPU was 2000 times more powerful than the N64's. That's a huge jump for a decade. But if we saw another 2000 times increase in GPU power from 2006 to 2016, the Pro's GPU would have been a whopping 800 TFLOPS instead of 4.2. Needless to say, 800 TFLOPS is a loooong way out, and we haven't even hit the 20 TFLOP mark for commercial GPUs yet.
Diminishing returns in processing power are going to, and arguably already have, result in diminishing returns for graphics. There is still a ton of improvements to be made, and graphics have definitely not even come close to hitting their peaks. We still have the prospect of games running at native 4K and 60fps and still putting anything out today to shame. There are still areas like draw distances & pop-in, aliasing/jaggies, lighting, and animation that could see absolutely massive improvements. But those advances are going to take longer to come about. The kind of increases that used to take five years could take ten or fifteen years. And eventually, the advances in graphics will reach a point where any future improvements will be so minuscule as to be practically unnoticeable. "Realistic" graphics will eventually get as realistic as they can, whether it be perfect photorealism or a damn good approximation thereof.
Honestly, this subject deserves a lot more time than I can give it right now, but it's a fact of life that there are always limits to growth, and that goes for computing power. Nobody should have expected the rates of increase we saw in past decades to continue at the same pace forever.