Index funds are appealing because of their low management fees, but if the giant companies stop beating the smaller ones, the actively managed funds could do better than the index funds. But I wouldn't put all my eggs in one basket. In fact, the PaineWebber group makes a pretty good case for how small stocks could beat big ones in the future. For one thing, there may be more bargains among smaller companies because they haven't been part of the big price runup that's affected big stocks in the last few years. Also, PaineWebber says, big and small companies get their stock-price gains in different ways.
Big companies tend to benefit from improving profit margins - earning more on each item sold.
Big companies have improved margins with the heavy cost-cutting of the last few years. But this may be a hard performance to repeat. So big-company stocks may not be able to continue the big price gains of the last few years. Small companies tend to raise their profits by increasing sales, and higher profits lead to higher stock prices. If small companies can continue to grow sales, while big companies fail to continue their dramatic margin improvements, small stocks may beat big ones.