At the beginning of June, the Nasdaq hit a record high, climbing above 27,000. A week later, after several days of profit-taking, it got another boost when SpaceX launched its IPO.

Since then, the Nasdaq, widely regarded as a bellwether for the US technology sector, has traded sideways. More significantly, most of the Magnificent Seven — the companies seen as leading the American AI revolution — saw their share prices peak around the turn of May and June. They have declined ever since.

Did SpaceX puncture the AI bubble? At the time, I noted that it could serve as a pointer for the future course of the AI trade — that if its share price kept rising, it might indicate the AI revolution was now moving into its next phase; but that if it declined, it might signal the moment the AI bubble burst. It thus bears noting that after peaking at over $200 shortly after its launch, SpaceX’s share price has fallen by over 25%.

There was always a risk that as the big “hyperscalers” like SpaceX, OpenAI and Anthropic went public, they could suck so much money out of the market that they would trigger a correction. But an even more consequential development may have occurred on the day SpaceX launched its IPO. The US government announced export controls on Anthropic’s Mythos and Fable models. Although the restrictions were later lifted, the move sent a chill through the markets.

Foreign consumers of US AI models suddenly realized how vulnerable they might be to an American administration that might decide to cut off their access to US models. In response, many began diversifying their options and started using Chinese models as well. Another factor driving the shift has been cost. As US AI companies moved from subscription-based pricing to charging for tokens, businesses found the cost of using AI models rising sharply, with little evidence of a corresponding boost in productivity. To contain costs, many began switching to cheaper, if only marginally inferior, models developed in China.

Should this trend take hold, the revenue model of the big American AI firms comes into doubt. The massive expected future earnings that investors have used to justify the soaring share prices of the Magnificent Seven also come into question. It stands to reason that some investors are thus looking to bank some profits to avoid the risk of getting burned.

If the AI bubble has truly burst, the next question is how far the damage will spread. Will falling share prices remain confined to the tech sector, as investors rotate into more traditional stocks and “broaden” the market, as analysts put it? The optimistic view is that a correction in tech could ultimately benefit the wider economy by encouraging a healthier distribution of investment.

However, given the degree of investors’ exposure to the AI bubble, there is a risk that falling share prices in the tech sector will force fund managers to sell other shares to make up losses, triggering what could become a self-reinforcing downward cycle. With US earnings season kicking off this week, investors will be watching closely to see whether corporate America is in the robust health its lofty share prices suggest. If companies disappoint, even slightly, this correction could have much further to run.

The AI bubble-burst watch has begun.