While stock prices have risen faster than S&P 500 profits, analysts expect earnings to pick up in 2014. Profits will expand 10 percent next year and 11 percent in 2015, according to Bloomberg data. Nine of 10 S&P 500 industries will post faster individual growth next year, analyst estimates compiled by Bloomberg show.

Fair Value

“The P/E is just a reflection of expectations of how much those cash flows are going to grow,” Wayne Lin, a portfolio manager at Baltimore-based Legg Mason Inc., which oversees $670 billion, said in a Nov. 13 phone interview. “Earnings can continue to grow,” he said. “This runup is just a return to fair value for equities.”

Shares of companies whose earnings depend on economic growth are still cheaper than historic averages. A group of technology stocks has a valuation of 14.6, 27 percent lower than the average since 1991 and a fraction of the level it reached in 2000, data compiled by Bloomberg show. Energy shares are 9.1 percent cheaper than the 22-year average.

The full S&P 500 trades at about 17.5 times trailing 12- month earnings, in line with the average since the end of World War II, according to S&P data. The multiple stayed low as profits almost doubled from the level in 2008 and the Fed’s accommodative policies kept stocks relatively attractive.

‘Not Expensive’

“With interest rates at current levels, the market is not expensive,” Donald Selkin, who helps manage about $3 billion as the New York-based chief market strategist at National Securities Corp., said in a Nov. 14 phone interview. “The market has room to go higher.”

Stocks have jumped as the Fed held its benchmark lending rate near zero since December 2008 and bought more than $2.3 trillion in Treasuries through unprecedented quantitative easing programs. Economists say the Fed will lower the $85 billion in monthly purchases to $70 billion in March, according to the median in a Bloomberg News survey conducted Nov. 8.

“What everybody’s been trying to figure out this year is how much longer is the Fed going to keep us on life support and if they do taper, are we going to continue to see the growth we’ve enjoyed the past couple of years?” Thomas Garcia, head of equity trading at Santa Fe, New Mexico-based Thornburg Investment Management Inc., said in a Nov. 14 phone interview. His firm manages more than $90 billion. “That’s the big question.”

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