As the world-wide bull market has begun to age, a trend has emerged in the past two years: Shares of companies in Europe and Asia have outpaced their U.S. competitors.

Here is a look at why, by region:

The U.S.

As interest rates rise and U.S. economic expansion threatens to slow, American investors are funneling more money offshore, betting that non-U.S. stocks will lead for years to come.

That is a big change from the late 1990s, when U.S. stocks dominated and foreign economies stumbled. Since the world-wide bear market of 2000 to 2002, foreign stocks have pulled ahead. The Dow Jones World Stock Index, excluding U.S. stocks, has risen 36 percent in the past two years, while the Dow Jones Industrial Average is up 5 percent and the Nasdaq Composite Index is up about 8 percent.

Because the U.S. consumer has been driving world growth, the world's stock markets could face trouble if the American economy slows. Many developing countries, such as China, depend on exports to the U.S., and their stock markets tend to be volatile -- risky in the short run.

"But in the long run, I think international investments offer real opportunity," says Jeff Schappe, chief investment officer at BB&T Asset Management, an arm of banking group BB&T of Winston-Salem, N.C. "I think that could well continue for the next couple years." BB&T is urging clients to keep 15 percent of their stock investments overseas, a much higher percentage than it has recommended in the past, and "we are considering raising that over time," Mr. Schappe says.

Aside from energy stocks, utilities and health-care companies, 2005 has been a bleak year for the U.S. stock market. Every other sector has been down, from big industrial companies to software makers.

The Dow industrials have fallen 4.6 percent since the year began, and the Nasdaq composite, 5.1 percent. The Standard & Poor's 500-stock index, with a large component of energy and health-care companies, has suffered less, and was up for a good part of the year. Now it is down 2.1 percent. Even the Russell 2000 small-stock index, which bucked the trend with records earlier in the year, is down 2.8 percent for 2005.

On Friday, the Dow rose 70.75 points, or 0.69 percent, to 10287.34 but it lost 4.97 points, or 0.05 percent for the week. The Nasdaq composite advanced 17.61 points, or 0.86 percent, to 2064.83 on Friday but dropped 25.52, or 1.2 percent, for the week.

"One of the reasons I think that the U.S. market has struggled this year compared to almost all of the foreign markets, is that we are virtually alone in facing monetary tightening" with interest-rate increases by the Federal Reserve, says Russ Koesterich, senior portfolio manager at Barclays Global Investors in San Francisco. "Until the Fed gives some sort of indication that they are near the end of their tightening campaign, the U.S. markets are likely to struggle." Higher rates boost costs for consumers and businesses alike, slowing profit growth, which hobbles stock gains.

Through August, American mutual-fund investors this year have put a net $61.7 billion into stock funds that invest mainly abroad, and $28.1 billion into funds that invest within the U.S., according to the Investment Company Institute, a mutual-fund industry group. The last year Americans invested more in foreign-oriented funds than in domestic ones was 1990.

Analysts offer a host of explanations for this shift. Americans are fascinated with China and with other fast-expanding foreign economies, which suddenly seem a lot more exciting than the U.S.

Expectations are widespread that developing economies will outgrow the U.S. for years to come, which has helped reawaken the interest in developing Asia that helped push those markets sharply higher in the early and mid-1990s. (Reflecting the risk of developing markets, however, Shanghai is one place where the market has fallen for years, mainly because of internal problems.)

In addition, Americans widely expect the dollar to resume its decline once the Fed stops raising rates. A falling dollar increases the value, in dollar terms, of gains recorded in the currencies that are rising, making foreign stocks more attractive.

What's more, stocks in many countries still look less expensive than U.S. stocks, making them potentially a better deal. Foreign stocks in general didn't rise to the same heights of overvaluation as did U.S. stocks during the booming 1990s, and they haven't risen enough yet to erase that advantage.

Stocks in some countries, such as Germany, do appear more expensive than U.S. stocks, when prices are measured in terms of company profits. But British stocks are trading at 12 times expected 2006 per-share profits and Japanese stocks at eight times, compared with a ratio of more than 14 in the U.S., says Linda Duessel, market strategist at Pittsburgh mutual-fund group Federated Investors, citing Morgan Stanley data. If the world economy slows now, foreign stocks could face the same risk of decline that U.S. stocks face.

Ms. Duessel says her research shows that, when the U.S. economy slows, stocks of European countries often hold up better than U.S. stocks. She adds she is a fan of Japan, as are many other analysts these days. "We think that international markets will outperform domestic markets for the next several years at least," Ms. Duessel says.

Europe

On the Continent, although October is shaping up to be a bleak month for stocks, European investors are still pretty cheery.

Most major European indexes are well in the black this year, many with double-digit increases. European companies are flush with cash, generating strong profits. Despite inflation fears, the European Central Bank isn't expected to raise rates swiftly.

In the near term, all this good news could be a recipe for trouble. Excess optimism can presage a market decline. "People don't see a reason to be cautious," says Mike Collins, senior investment manager at Pictet Asset Management in London. "Usually, historically, that's the time to get concerned."

Goldman Sachs Group remains "bullish on European equities," but this year's gains could "signal elevated expectations" going forward, the company said in a report. Its advice: Investors sticking with European stocks might want to hedge some of their gains before year's end.

Goldman doesn't see a host of ills about to plague European markets, but it does worry that a weakening U.S. consumer could threaten European profits. Mr. Collins, too, has trouble finding an immediate threat. His main worry is that the Federal Reserve will stop raising interest rates next year, or perhaps even cut rates. That could boost U.S. markets and lure some investment money from Europe.

But given U.S. inflation fears, Mr. Collins isn't expecting that anytime soon. Although fund managers who have been in love with Europe for more than a year may be tempted to lock in profits, "it's difficult to abandon what's worked," he says.

Indeed, 14 of 18 Dow Jones Stoxx sector indexes have registered double-digit gains so far this year. Only stocks in the media, travel and leisure, telecommunications and retail sectors have failed to keep pace. On the individual country level, despite recent pullbacks, France's CAC 40 Index is up more than 17 percent, Germany's DAX nearly 17 percent, and Britain's FTSE 100 Index close to 9.6 percent. Overall, the blue-chip Dow Jones Stoxx 50 Index has posted a 14 percent increase since the start of the year, while the broader-based Dow Jones Stoxx 600 Index is up nearly 15 percent.

Bulls say there are plenty of Europe-specific factors to keep the rally going. Europe is undergoing an unprecedented wave of corporate restructuring just as the addition of Eastern European markets to the European Union makes the entire Continent more competitive.

"On the ground, we're seeing lots of examples where companies on reasonable valuations are engaging in fairly radical, by European standards, corporate adjustments," says Richard Batty, global investment strategist at Standard Life Investments in Edinburgh, Scotland. "Overall, this will mean the European market can continue to move ahead." He points to the unwinding of cross-shareholdings between big German companies such as insurers Munich Re AG and Allianz AG, and the movement of jobs to lower-cost Eastern Europe by German companies such as truck maker Man AG.

These help explain the decoupling of U.S. and European stock markets, which historically have tracked each other's performance closely, Mr. Batty said.

Moreover, profit growth in 2006 is expected to average about 10 percent at European companies. Annual dividend growth of about 21 percent on the Continent is at its highest level since 1987, a Lehman Brothers report notes. The growth in dividends, which results in yields that are often above 4 percent, is a key underpinning of the market given that 10-year German bonds yield about 3.25 percent. This means investors buying higher-yielding European stocks not only get paid more through the dividend than they would if they bought safer bonds, but there also is the chance of capital appreciation.

"We've favored Europe for the past 18 months and we're not of the mind to change that anytime soon," Mr. Batty said.

Asia

Meanwhile, major Asian stock markets may struggle to maintain momentum, as inflation buffets global consumers, slowing capital flows to the region.

A pullback would represent a turnaround from the past two years, when Asian stock markets have enjoyed an extraordinary run with double-digit returns in many countries. The boom is the fruit of a long recovery from the region's 1997-98 financial crisis, which sent investors fleeing. As companies rebuilt balance sheets and global growth recovered, boosting exports from the region, investors returned, grabbing beaten-down stocks.

Despite recent pullbacks, Seoul's Kospi index is up 33 percent since Jan. 1. India's Sensex has risen 24 percent and Australia's S&P/ASX 200, 9 percent. All three this year hit their highest levels ever, at a time when major U.S. indexes are down.

But worries are spreading about the impact of rising oil prices and a slowing U.S. economy on Asian stocks. Analysts are busily downgrading their target prices for the region's markets as economists reconsider their expansion forecasts.

At today's prices, investing in Asian markets "seems to be less attractive in the sense that you have to pay high price-to-earnings ratios," says Chakara Sisowath, a fund manager at Comgest Far East, a Hong Kong unit of the asset-management company.

Much hinges on the American consumer's readiness to spend, and the U.S. stock market's tumble has helped push down Asian markets. As Asian central banks mirror the U.S. Federal Reserve and raise interest rates to combat inflation, domestic consumers may pull back on spending. Taiwan and Indonesia are most exposed to such a move, thanks to rising levels of household debt in those countries, according to ABN Amro. The Dutch bank is advising clients to reduce exposure to those countries, and to China and India, two of the world's fastest-expanding economies, citing expensive stock valuations.

Still, if energy prices decline, the U.S. consumer continues to spend and Japan sustains a recent economic recovery, Asia could remain on a firm footing. Even if there is a pullback, it may not represent a collapse. Excluding the effects of oil prices, Indian corporate profit growth, for example, is expected to decelerate to about 15 percent in the next 18 months, from 25 percent to 30 percent in recent quarters. That is one of the region's best growth rates, a Citigroup report says.

The bank's Mumbai stock strategist, Ratnesh Kumar, thinks the Sensex is roughly 20 percent overvalued at current levels and is urging investors to be "cautious," but he reiterates that the economy remains in a "very, very robust phase."

Investors are closely monitoring the nascent recovery in Japan, the world's second-largest economy after the U.S. A stronger Japan could boost Asian economies, as Japanese consumers demand more goods, and it could stimulate Japanese investment in Asia, according to Goldman Sachs. The Nikkei index has risen 17 percent so far this year, and many investors are turning bullish.

"Japan has now begun the second stage of a new secular bull market and ... investors should remain heavily overweight domestic shares since this is a 10-year story, not a three-month trade," wrote CLSA Asia-Pacific Markets strategist Christopher Wood, in a report.

Singapore's Straits Times index is up 11 percent in 2005, and analysts think it will remain on a similar path in the fourth quarter if energy prices don't damp investor sentiment. Neighbor Malaysia's 2006 stock performance may depend on its ability to reform its government-linked companies.

A report from Citigroup's Kuala Lumpur analyst Chi-Chang Teh advocates buying into "direct beneficiaries" of reform, including Malaysia Airport Holdings and government-controlled power utility Tenaga Nasional Bhd. "It is a brave position considering headwinds such as the price of oil, the prospects of the U.S. economy and the competitive threat to Malaysia posed by China's manufacturing prowess," he wrote. "But we see the government-linked corporation reform theme playing out as the positive catalyst."