U.S. News

Market Outlook: Big Caps May Lead Stocks Again in 2007

Phyliss Goffney

Big-cap stocks have been the main drivers of the market rally this year, and many analysts think that may continue in 2007.

"Until about two years ago, we were overwhelmingly small-cap and mid-cap and we had roughly only 8% of our asset base in large-cap," Chuck Lieberman, Chief Investment Officer at Advisors Capital Management, told cnbc.com.  "Today, it's the reverse."

Analysts say big caps--companies with a market value of $5 billion or more--tend to have better balance sheets, international exposure and a variety of revenue sources.  These factors make larger companies attractive in a slowing economy.

Small Caps Less Favored

Moreover, about 64% of small-cap portfolio managers surveyed by Lehman Brothers believe that small caps will underperform large caps in 2007.

Not all big-cap sectors will perform equally, however.

Better-than-expected earnings growth helped power cyclical big-caps such as energy and materials stocks in the last six months, according to Scott Wren, Senior Equity Strategist with AG Edwards. But he doesn't expect the rally in cyclicals to continue next year.

"You are going to see earnings growth down at about 7% or 8% in 2007 from maybe 14% for this year," Wren told cnbc.com. "The defensive sectors such as healthcare and consumer staples are going to be the ones that outperform in that environment."

Energy a Top Performer

The energy sector alone has gained more than 16% in the past six months. Robert Doll, Chief Investment Officer at BlackRock, believes it will be one of the winners of 2007.

"On the positive side, I like energy, healthcare and technology," Doll told CNBC's "Squawk Box." "Energy and technology have in common high cash flow and high percentage of earnings outside of the United States, which I think is an important theme for next year and I think the stocks are reasonably cheap."

Doll believes utilities and telecom will not perform as well next year as they did in 2006 and he says, that while consumer staples are more defensive, they're not cheap.