In search of quality.

IF the stock market followed instructions, big stocks would rally any day now.

That's the expectation of a broad array of analysts and mutual-fund managers, who cast a skeptical eye on the recent vogue for smaller, riskier stocks--and think the big blue chips are overdue for a turn in the spotlight.

"We believe 2004 will mark the transition in stock-market leadership from speculative stocks to high-quality stocks," said Richard Hoey, chief economist and investment strategist at Dreyfus Corp., manager of a $167 billion fund group. "We believe that a major theme over the next two years will be a trend towards quality."

Or listen to strategists at Putnam Investments, which manages $227 billion: "High-quality stocks will eventually regain market leadership. The timing of this shift is unclear, but it is inevitable in our view given wide valuation gaps between high- and low-quality stocks."

The disparity between big and small stocks has been striking. Small-cap funds growth and value funds averaged a 10.5 percent annual gain in the five years, according to Bloomberg data. During the same stretch, large-cap growth and large-cap value funds averaged a 2.1 percent annual loss.

So far this year, small-cap funds are up 5.1 percent, more than double the large-cap funds' 2.4 percent rise. Those results are consistent with a two-to-one year-to-date edge for the small-stock Russell 2000 Index over the large-stock Russell 1000.

"There is an opportunity for more-rapid earnings growth than you've seen. That is what the Russell is telling you," said Buzz Zaino, manager of the $2.1 billion Royce Opportunity Fund, which specializes in small stocks.

Makes sense. In a period of stronger-than-expected gains in corporate earnings, the biggest positive surprises are likely to come from smaller companies, operating as they do from a smaller base.

The question then becomes, for how long and how much will earnings growth continue to exceed expectations?

"Corporate profits have been so strong over the last year that almost all forecasters agree that the rate of growth will slow," said Hoey in a Web site commentary. "The news on profits is hardly likely to continue to improve at the same pace. We expect a gradual shift to dominance by the high-grade stocks."

Friendlier treatment given to dividends by the U.S. tax law enacted in 2003 was widely expected to juice up big stocks, given that mature companies tend to be the stronger dividend payers.

Though that didn't happen, a belief persists that the effect has merely been delayed. If so, then why has it taken so long? Predictions of a shift to big stocks have been making the rounds for a good six months or longer.

Zaino said he believes the stock market still hasn't fully taken account of the growth possibilities raised for small companies because of worldwide economic growth paced by emerging economies in China, India and elsewhere. "All these pressures are producing better economic activity in the U.S.," he said.

If history is any guide, enthusiasms for big or small stocks do go in cycles. Yes, the Russell 2000 beat the Russell 1000 by more than 10 percentage points in the five years through the end of March. But in the five years before that, the Russell 1000 rose 22.8 percent a year, more than twice the Russell 2000's 9.6 percent annual gain.

If the goal is an investment plan for all seasons, it makes better sense to mix big and small.