Large-Cap Growth's Shrinking Feeling

Not everybody is convinced that 2005 will be the year large-cap growth funds break their losing streak, however. Sam Stovall, chief investment strategist at S&P, says the third year of a bull market tends to be tricky for large-cap stocks, with an average S&P 500 return of 3%.

"Overall returns get more challenging as the stock market advance ages," says Stovall. "More often than not, large-cap stocks are flat to down in the third year of a bull market." Stovall predicts the S&P will close 2005 at 1300, 8% above today's level.

If Stovall is cautious, Lipper strategist Andrew Clark is downright skeptical -- not just of large-cap growth, but of the bull market.

"Large-caps have gone sideways over the last three years and are still lower than where they were in 2000, which means we are in an overall bear market," says Clark. "In the past two serious bear markets, small- and mid-caps beat large-caps, and that will continue through next year."

Doubters like Clark, however, don't seem to be affecting the optimism of fund managers like Bill Page of the $21 million (SSLOX Quote)State Street Large-Cap Growth Opportunities fund. Page is stocking up on traditional favorites like General Electric (GE Quote), Coke (KO Quote) and Rockwell Automation (ROK Quote) ahead of what he expects to be a big year for companies that are better capitalized to weather higher interest rates ahead.

He also likes Microsoft (MSFT Quote) with its increasing focus on dividends -- putting it in a club well frequented by larger companies with long histories of growing earnings.

"It's not about multiple expansion anymore," says Page. "It's about earnings and dividends."