Without circuit isolation, all traffic from a Tor client could share a single circuit. An adversary who controls an exit node would see all traffic from that circuit to clearnet destinations. By correlating which destinations a single circuit accesses, the adversary builds a profile of the user's browsing session. This profile can sometimes reveal identity through the combination of sites accessed, timing patterns, or logged-in account activity.
Circuit isolation prevents this by ensuring traffic to different first-party domains uses different circuits. Even if an adversary controls an exit node that sees traffic from multiple circuits, they cannot link the circuits to each other without performing traffic correlation at the Tor entry point - a much more expensive attack.
Tor Browser enables isolation by default for new identity and per-site isolation for most traffic. This is the right default for high-privacy browsing. Understanding when to reduce isolation for performance enables informed trade-offs for users whose threat model does not require per-site circuit isolation.