London(CNN) For years, international investors preferred American stocks to European ones. But at a time of alter in monetary markets, favor is shifting.

On Friday the STOXX 50 index — which tracks Europe’s blue-chip firms — hit its highest level in 22 years. It has jumped ten.eight% year-to-date. The region’s broader STOXX 600 index is up 9.9% so far this year.

By comparison, the Dow Jones Industrial Typical in the United States has climbed two%. The broader S&ampP 500 is 7.five% greater.

This year has observed a “important outperformance of Europe” right after a lengthy stretch when it was “an unloved area,” mentioned Richard Saldanha, lead manager for the Worldwide Equity Earnings Fund at Aviva Investors.

Shares of LVMH (LVMHF), Europe’s most useful organization, reached at an all-time higher this week right after the luxury goods giant reported robust sales lifted by a rebound in China.

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Nevertheless, the situations that have driven Europe’s winning streak are altering swiftly. Quite a few investors are convinced the Federal Reserve could pause interest price hikes quickly as inflation in the United States falls and fragility in the banking sector increases the likelihood of recession later this year.

That raises queries about how lengthy Europe’s dominance can final.

Why Europe is out front

When interest prices have been at rock bottom, investors flocked to the US stock market place to obtain shares in the country’s technologies businesses like Apple (AAPL), Amazon (AMZN), Microsoft (MSFT) and Tesla (TSLA). These “development” stocks gave investors a stake in firms that have been on track to expand their corporations rapidly and produce hefty returns.

But as borrowing fees have shot up, jeopardizing financial development, expectations for future income have been lowered and much less risky investments have also began to supply tempting returns. Tech stocks have slumped as a outcome.

Now, investors are much more drawn to “worth” stocks: businesses believed to be trading at a discount primarily based on their monetary overall performance. And that is benefiting Europe.

The “low-interest-price regime has changed, and that implies there is been a alter in leadership away from the development businesses and much more into worth businesses,” mentioned Saldanha at Aviva Investors. “That definitely plays into Europe, which has usually been much more of a worth market place than the US.”

In spite of issues about the international banking sector following the failure of Silicon Valley Bank and emergency rescue of Credit Suisse final month, shares of European lenders — observed as “worth” picks — have gained ground this year. Shares of Italy’s UniCredit (UNCFF) are up much more than 40% given that the start off of 2023, even though Spain’s Banco Santander (BCDRF) is practically 30% greater. US peers, meanwhile, have suffered losses.

An additional cause for Europe’s outperformance has been the alter in financial expectations about the start off of the year. Investors had been bracing for a painful recession in the area as higher power costs hurt buyers and corporations.

Financial development in the nations that use the euro flatlined in the final 3 months of 2022. But investors have been encouraged by a current pullback in power costs and indicators of financial resilience in early 2023. The reopening of China’s economy has also been useful, given that a lot of European corporations are key exporters.

“The significant power-connected recession in Europe wasn’t coming by means of. China’s reopening was coming by means of,” mentioned Andreas Bruckner, European equity strategist at Bank of America. That is been a “close to-excellent mixture” for European stocks to beat their US peers, he added.

Can the boom final?

Investors are divided on no matter if Europe’s moment in the sun can endure. Quite a few of the region’s stocks nevertheless appear like fantastic bargains, even with current gains. Europe really should also continue to advantage from the uptick in consumption in China.

“There is very a lot of area for this to continue to play out,” Saldanha mentioned.

Even so, what occurs subsequent in Russia’s war in Ukraine remains unpredictable. And the financial outlook for the second half of this year is uncertain.

Economists at the Fed predict the United States will fall into a “mild” recession as a outcome of the current banking crisis. There are queries about no matter if Europe could stick to.

“We believe we’re now at the turning point exactly where development begins to weaken,” Bruckner mentioned.

If the Fed, worried about the severity of a prospective downturn, stopped raising interest prices — and even started to reduce them — US development stocks could see a resurgence, even though worth stocks in Europe may possibly after once more be cast aside.

And more than the longer term, the significant quantity of older, established corporations in Europe compared with thrilling upstarts in the United States puts Europe at a disadvantage, Bruckner mentioned, warning of “the old-versus-new economy divergence.”