NEW YORK (CNN/Money) - If history repeats, rising interest rates will put pressure on stocks, keeping a lid on price-to-earnings ratios.

But if rates don't rise very far or very fast, then earnings growth could carry the day, pushing stock prices higher, even as P/Es 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."

In addition to increasing the cost of doing business and thus hurting profit margins, rising interest rates can hurt stock prices by making bonds more attractive. Investors will favor bonds over stocks, many analysts say, until stocks get cheaper relative to earnings.

In other words, if rates move higher, then either corporate earnings must rise or stock prices must fall (or some combination) to bring the valuations of bonds and stocks back into line.

Stocks in the S&P 500 are pretty expensive right now, historically speaking, trading at more than 19 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 approaches 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.

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 17, 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."

Meanwhile, interest rates are clearly on the rise. The yield on the 10-year note has jumped a full percentage point since March. The Federal Reserve is almost certainly going to raise its target for the fed funds rate this week.

The Fed hopes and plans to raise rates slowly. 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 corporate 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.

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.

Edward Yardeni, chief investment strategist at Prudential Financial, in a recent note to clients, 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, the "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 4.7 percent, so Yardeni's forecast would seem to be for a gentle, upward climb in 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.  

-- this is an updated version of a story that first ran on June 9, 2004.