The US stock market, previously led by the Magnificent Seven tech giants, is experiencing shifts in leadership. Stocks like Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla have ceded their dominance, with semiconductor stocks also recently fading. This volatility, highlighted by the collapse of the AI-focused hedge fund Situational Awareness, reflects a rational market struggle to understand the competitive landscape of an AI-pervaded economy.

The "increasing returns era," characterized by knowledge industries with high barriers to entry, has historically driven market wealth creation, exemplified by companies like Microsoft and Alphabet. However, artificial intelligence poses a threat by potentially commoditizing knowledge, making some businesses obsolete and possibly leading to AI industries with low barriers to entry. This could result in intelligence becoming a commodity, benefiting the economy but disappointing investors.

Markets are pricing in the possibility that the era of increasing returns may be ending. This is evident in the jitters of tech stocks when faced with lower-cost competitors and the inability of chipmakers to sustain leadership if AI service providers cannot achieve outsized profits. Consequently, investors are re-evaluating tech stocks as riskier and may find traditional competitive advantages, such as brands and distribution, relatively more valuable.