Sorry but in case of LOTR, I don't think what You're saying has much to do with the way movie industry works. I get what You are talking about. We don't really see any truly astethicaly gritty or earthly movies today (we hear "gritty" a lot, but its bull****. Hollywood hasn't made a single truly gritty blockbuster since the 80's). But in case of LOTR PJ had carte blanche from the producers and he and Weta never sacraficed their vision based on how Hollywood expects fantasy films to look like. Everything looked they way it looked in that trilogy, becouse it fit the source material.
For example Your complaint about the Hobbits is, well...strange to say the least. They weren't cartoony or caricatural. Just becouse they were a bright, old-english jolly race, doesn't mean they weren't grounded. There wasn't anything flashy, unrealistic or "hollywoody" about them. Can't really imagin any director who would take an even more grounded approach with them (and how would that even look like).
Same goes for Gandalf. He was stern and often scornful, but filled with just enough "old man warmth and compassion" to make him endearing. And even if You imagined him differently, I don't really see whats flashy or hollywood'y about McKellen's potrayal.
Generally, I think You might be mistaking "grounded" and "earthy" with "Dark". Middle Earth isn't Conan's Hyboria. In fact "grounded" and "earthy" is exactly how PJ's original trology was often described. A few over the top moments didn't infleunce the generall vibe in my opinion.
Well, thats a criticism more for the newest trilogy, since in the old one, Jackson's over-the-top indulgences were just singular moments, rather then the general flow of the films.
