NEW YORK (CNN/Money) - If history repeats, rising interest rates should help keep stocks cheap, putting a lid on price-to-earnings multiples, which are already near their historic highs.

But if rates don't rise very far or very fast, then earnings growth could be strong enough to help stock prices rise this year anyway, even as P/E ratios shrink.

"The challenge is going to be a tug of war between increased earnings and decreased multiples," said Jack Ablin, chief investment officer at Harris Trust. "I believe the increased earnings will win out."

While adding to the cost of doing business and hurting profit margins, rising interest rates can hurt stocks in another way, by giving fixed-income investments such as bonds a bigger pay-off. In order to compete and keep attracting investors, stocks have to get cheaper relative to their underlying earnings, according to many analysts.

For example, if shares of Acme Anvil Corp. trade at $10 and Acme earns 50 cents a share, then Acme has a price/earnings ratio of 20, or a "yield" of 5 percent. If the yield on the 10-year Treasury note is also 5 percent, then Acme is fairly valued, according to some analysts' measure.

If the yield on the Treasury note moves up to 6 percent, according to this theory, then Acme's yield must follow suit, meaning its P/E ratio must fall.

Cheap or not? The S&P 500's P/E ratio at various times in recent history Month  P/E ratio  Context  June 1949  9.07  Just before 1950-66 bull market  Jan. 1966  24.06  At end of 1950-66 bull run  July 1982  6.64  At end of 1966-82 bear market  Sept. 1987  17.68  Just before Oct. '87 crash  Dec. 1999  44.20  At end of late '90s bull market  Sept. 2001  27.67  After Sept. 11 terror attacks  June 9, 2004  23.13  Present valuations aren't astronomical, but still historically high   Source:  Robert Shiller, Baseline

If Acme's earnings are rising, then its P/E will be pushed down by keeping prices flat. In fact, to achieve a 6 percent yield, Acme must boost its earnings to 60 cents just to keep its stock price at $10, theoretically. But if its earnings are any weaker than that, then its share price will fall.

Stocks in the S&P 500 are pretty expensive right now, historically speaking, trading at more than 23 times the past year's earnings. That's well below the 40-something multiples at the peak of the late 1990s bubble, according to data compiled by Yale economist Robert Shiller, author of "Irrational Exuberance," but matches the levels in 1966, at the peak of the 1950-1966 bull market and in 1995, just three years before the peak of the 1982-1998 bull market.

In contrast, at the end of the 1966-82 bear market, when interest rates were super-high, S&P 500 stocks traded at a paltry multiple of less than 7 times earnings.

Forward-looking P/E ratios for the year are more subdued at about 18 times expected earnings, but that's still at the high end of their historic range between 10 and 20, according to Larry Wachtel, market analyst at Wachovia Securities.

"It's not like stocks are sitting there unloved," Wachtel said. "They have done well."

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Meanwhile, interest rates are clearly on the rise. The yield on the 10-year note has jumped a full percentage point in just the past two months. The Federal Reserve is almost certainly going to raise its target for the fed funds rate -- a key overnight lending rate -- in June, and markets expect more rate hikes throughout the rest of the year.

The Fed hopes and plans to raise rates slowly, believing inflation to be fairly tame. If it does, then much of the pain of higher rates may already have been priced into the market during its sluggish stretch from January to May of this year. If earnings continue to rise, then stock prices should climb, too, despite the somewhat higher rates.

"Earnings are likely to continue to become more favorable, and I believe that will counteract the negative effect of rising rates to provide for higher stock valuations by year-end," said Robert Balentine, CEO of Balentine & Co., a money management firm in Atlanta.

To be sure, earnings estimates continue to ratchet upwards, with the consensus estimate for 2004 S&P 500 earnings climbing recently to a record $68.42, according to earnings tracker First Call, an estimate that's jumped by about $4 in just the past month.

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Edward Yardeni, chief investment strategist at Prudential Financial, in a note to clients on Wednesday, said it's a "slam dunk" that the consensus earnings forecast will keep climbing to his standing estimate of $70 -- though he's not quite so sure how high stock valuations will climb.

"Our forecast of a forward P/E of 18.6 by year-end remains iffy, but if we're right the S&P 500 should rally towards 1,300 by year-end," he wrote, adding, "P/E rarely rises when bond yields are moving higher, but can once the yield has leveled off, which we expect later this year [with the yield on the 10-year note] around 5.0 percent to 5.25 percent."

The 10-year note now yields about 4.8 percent, so Yardeni's forecast would seem to be for a gentle, upward climb for interest rates -- the consensus view at this point.

But if inflation forces the Fed to hike rates faster than it wants, or if earnings growth isn't as robust as many expect, then stock prices could be in for a rougher ride.