NEW YORK (CNNMoney.com) - Tech stocks are having a cracking 2006, with the NASDAQ hitting a five-year high this month, but some sectors are primed for better growth than others.

Hardware is hot, but software – maybe not, judging by the Standard & Poor's technology sub-indexes. Here's a look at the near-term prospects of these stocks, along with a big-picture view of the trends that will shape these sectors in the months to come.

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Also, because this is the first quarter that many tech companies are required to report employee stock option compensation as an expense, that will affect year-over-year comparisons, noted Scott Kessler, who heads up the information technology research group at Standard & Poor's Equity Research. That means that growth in some sectors may not actually be slowing, even though it appears that way.

What's going on now: First quarter earnings for the Standard & Poor's application software index are expected to drop 20 percent from last year. A big reason for that drop is because the application software sub-index includes firms that offer stock options to employees, like Adobe Systems, Autodesk and Intuit, which hurts their year-over-year comparisons, since they are reporting these options as an expense for the first time, Kessler said.

But the systems software index, of which Microsoft is a large component, is expected to grow first-quarter earnings by 20 percent, said Kessler.

The big picture: Kevin Landis, portfolio manager of the Firsthand Funds, said that in much the same way that computers – once expensive and mammoth in size – have gotten much smaller and cheaper, enterprise software, or the large software applications that businesses use, is also shrinking.

Only a handful of the big enterprise players, such as Oracle (down $0.08 to $13.70, Research) and SAP (down $0.39 to $55.23, Research), are left, with the industry shifting to a "software as service" model – download only the software you need, rather than buying an expensive, one-size-fits-all application. Companies offering this model include Salesforce.com and RightNow Technologies.

Landis said this transition is difficult, and one the software industry will grapple with for the foreseeable future.

Another huge trend: open source software, such as Linux, in which programmers can read, redistribute and modify the source code. Millions of computer users have downloaded open source operating systems, Internet browsers and even word processing programs for free. One only needs to witness the popularity of Mozilla's open-source Firefox browser to see evidence of open source trickling down to the masses.

"I've got two computers – one is my Bill Gates computer and one is my non-Bill Gates computer," said Landis. "There are more and more things I can do on the (non-Gates) computer. It places real pricing pressure on the software that you'll pay for."

What's going on now: The S&P hardware sub-index, which includes Apple (down $0.44 to $66.27, Research), Dell (down $0.40 to $29.25, Research) and IBM (up $1.04 to $81.79, Research), is expected to grow earnings nearly 19 percent year over year for the quarter, thanks in part to Apple's stellar iPod-driven performance, said Kessler.

He's less optimistic on Dell, in part because he thinks its margins will drop as the average price of laptops declines and it has to cut prices to compete.

"They've been a low cost, high price producer," he said. "The fact that people were, in droves, buying laptops from Wal Mart this holiday season suggests that price was becoming more of an issue."

The big picture: Landis of Firsthand thinks that the biggest growth potential on the hardware front will come from consumers. When you broaden the definition of "hardware" to include other devices that sit in the home, such as set-top boxes and TVs, the hardware industry has big growth potential thanks to trends in the networking industry, such as the boom in high-speed Internet and digital cable, he said.

"The broadband build-out to people's homes complements the upgrade that goes on in your living room," said Landis. "That's why you hear so much about triple play," he said. "Those are really big, powerful trends."

Also on the consumer front, Landis said the "India and China" effect cannot be overstated. Both those countries boast growing middle classes and have reached an "inflection point" and are now buying electronics like cell phones in droves, he said.

What's going on now: Internet software and services is another sector that's facing tougher year-over-year comparisons due to stock options expensing. That, more than fundamental problems, is why earnings in the sub-sector are expected to drop 4.2 percent for the quarter, according to Kessler.

"Ebay (up $0.15 to $38.62, Research), Yahoo! (down $0.17 to $30.93, Research), Verisign (up $0.67 to $24.70, Research) – they're all showing substantial growth in revenues," said Kessler.

The big picture: Landis is also bullish on the sector for the long run.

"One of the signs that Christmas is here is when you see the news stories about how people are doing more shopping online this year than they did last year," said Landis. "Think back to the last time you didn't see that headline at the holidays. And you're going to keep seeing it."

What's going on now: It may seem odd that earnings growth in this sector is actually expected to drop 2.6 percent for the quarter while the hardware sector is up. Kessler said one reason is because Intel (up $0.38 to $19.50, Research), which has struggled in the last few months, is a large component of the Standard & Poor's semiconductor sub-index.

Also, many of these Silicon Valley-based companies offer employee stock options, so those expenses are hurting year-over-year comparisons.

But Kessler said his team is constructive on semiconductors in general. While Intel faces challenges and rival AMD (down $3.49 to $31.93, Research) faces the risk of an Intel-fueled price war, he thinks the sector as a whole is not facing a cyclical downturn.

As for semiconductor equipment makers like Applied Materials (up $0.72 to $18.14, Research) and KLA-Tencor (up $1.11 to $47.61, Research), Kessler of Standard & Poor's said he expects that segment to grow faster than the semiconductors themselves. Standard & Poor's is forecasting year-over-year earnings growth of nearly 26 percent for the quarter.

"The semiconductor industry now is all about getting chips to be smaller and smaller, and more and more powerful, while consuming less energy," said Kessler. "To do that, you need wholly new plants to do everything that's required to create a chip."

The big picture: Since cell phones, set-top boxes, and myriad other products require chips, Landis of Firsthand thinks the chip industry is healthy right now and for the longer term as well. But he's not willing to make a call on the notoriously unstable semiconductor equipment business.

"People in that business are in it because they have learned to live with the instability," said Landis.

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AMD is back in the black: More here.

Intel, Baidu team up in China: Click here.