3D graphics were always going to progress slower and slower as time went on.
We got the big things... more polygons, lighting, bumpmapping, HDR etc. They came gradually, until we now ultimately have a full set of tools. We've had these tools for a couple of years now and changes are going to be small from now on, that big leap we got every generation isn't going to happen again. I'm not saying we can't improve massively, but the changes will be small over time. Things like tesselation and more light sources are great, but they arn't going to radically change the way we see games anytime soon, they are just a small piece of the pie.
We're at a point now where art direction seems to be the key in creating the "wow" factor. We're no longer limited by the game engines as much. For example, has anyone tried the TOD mods for Crysis and seen the huge improvement in graphics quality? It looks significantly better and it purely an improvement over the stock art direction.
And the next step for me to create that realism, above some extra lights or polygons, is animation based on physics. Pre-canned animations, and watching guys ice skate over surfaces breaks that feeling of involvement. How many times have you shot a guy 20 times with no reaction from him, apart from perhaps an occasional pre-canned "hit" animation, until he finally keels over in one of 5 randomly assigned death animations based on the last hit point you shot?
As much as the Grandtheft Auto 4 engine physics were a bit weird at times, I liked the effort they put in to it. Shoot a guy in the foot and watch it fall out from under him like he actually felt it.