NEW YORK (CNN/Money) – How about a big round of applause for small-cap stocks?

For the second year in a row, investors would have been better off betting on relatively tiny companies instead of big, bad, brand-name behemoths.

The Russell 2000, a benchmark for small companies, is up more than 12 percent this year compared to a 6 percent gain for the S&P 500. In 2003, the Russell 2000 gained 45 percent, well ahead of the S&P 500's 26 percent increase.

So can small-caps do it again in 2005? After a two-year winning streak against their larger brethren, it's reasonable to expect that large-caps could take back center stage.

But there are several factors in small-caps' favor. For one, investors have hungrily started to scoop up growth stocks. And it looks like small-cap stocks have a better chance of posting bigger earnings gains next year.

"The ability of smaller companies to keep growing is greater than large-caps. It's just the law of large numbers," said Lester Rich, managing director with StoneRidge Investment Partners, an institutional money management firm, referring to the fact that it gets more difficult for large companies to post big percentage gains once they reach a certain size.

Analysts are forecasting an earnings increase of 51 percent for Russell 2000 companies in 2005 and just a 6 percent profit gain for S&P 500 companies, according to Thomson/Baseline.

Small-caps have been the way to go for the past two years. Can the Russell beat the S&P again in 2005?

What's more, the estimated long-term earnings growth rate for the Russell 2000 is 15 percent compared to an expected 6 percent increase annually for the S&P 500. This could set the stage for small-caps to keep outperforming large-caps well beyond 2005.

"There is an opportunity for small-caps to run to the upside for the next few years. Trends in the market tend to stay in place for a while," said Rich.

If the Federal Reserve keeps raising interest rates, which is widely expected, that could help small-caps outperform larger companies as well, said Thomas Laming, president and chief investment officer of TrendStar Advisors, which runs the TrendStar SmallCap and Quaker Small Cap Trend funds.

Laming argues that when interest rates are climbing, small-cap stocks won't be hurt as much as larger companies because small firms tend to carry lighter debt loads. Hence, smaller companies won't suffer from higher interest expenses to service this debt.

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"Small-caps should do better because they are less sensitive to interest rate increases," Laming said. "A rising rate environment historically correlates with small-caps outperforming," he said.

Still, there is a risk for investors looking to jump aboard the small-cap express at this stage of the game: you have to pay up for their growth prospects.

The Russell 2000 is trading at about 22 times earnings estimates for 2005 while the S&P 500 trades at a multiple of about 17 times earnings estimates.

This premium might be a little too high, said Michael Mara, manager of the Penn Street Advisors Sector Rotational fund, which uses quantitative models to figure out what stocks to buy and sell.

Mara said valuation concerns are a reason why he's started to shift money in his fund out of some of the small caps into larger names.