Price gains of stocks in the Standard & Poor's 500 Index areoutpacing profits by the fastest rate in 14 years as the bullmarket extends beyond the average length of rallies since Harry S.Truman was president.

The benchmark gauge for U.S. equities has risen 14 percentrelative to income over the past 12 months—to 16 timesearnings—according to data compiled by Bloomberg. Valuations lastclimbed this fast in the final year of the 1990s technology bubble,just before the index began a 49 percent tumble. The rally thatstarted in March 2009 has now outlasted the average gain since1946, the data show.

Bears say the failure of earnings to keep up with prices signalsthe bull market is in its last stages, as companies fromCaterpillar Inc. and Danaher Corp. forecast slower profit growthand the Federal Reserve prepares to reduce stimulus. Optimistspoint to expanding multiples as proof individual investors aregrowing confident enough in the economy to return to stocks.History shows the final phases of rallies have provided some of thebiggest gains.

“Markets have been running away,” Robert Royle, who helpsoversee $21 billion as manager of the North American Trust at Smith& Williamson Investment Management LLP in London, said bytelephone on Aug. 20. “Everyone is hoping for a second-halfrecovery in fundamentals,” he said. “I am just not sure what willdrive the recovery.”

The S&P 500 advanced 0.5 percent to 1,663.5 last week, asglobal manufacturing and the American labor market showed signs theeconomy is improving. The index is up 17 percent this year, thelargest advance over a comparable period since 1997, and climbed toan all-time high of 1,709.67 on Aug. 2.

The S&P 500 has risen 146 percent since bottoming in 2009.The 53-month gain has surpassed the average length of bull marketssince 1946 by about four months, data compiled by Bloomberg show.The index gained 0.3 percent at 11:04 a.m. in New York today.

Combined profit at S&P 500 companies surged 37 percent in2010, 19 percent in 2011, and slowed to 2.3 percent last year,Bloomberg data show. Earnings increased 3.6 percent and 3.7 percentin the first and second quarters. Analysts have cut projections for2013 profit by 0.7 percent this year to $110.22, a 9 percentincrease from last year, based on more than 11,000 estimatescompiled by Bloomberg.

Dot-Com Crash

The last time gains in stocks outpaced profit expansion by thismuch was in 1999, when equity valuations surged 19 percent in ayear, to 30 times reported profit, according to data compiled byBloomberg. That bull market ended the following year, with theS&P 500 tumbling 49 percent from March 2000 through October2002 as the dot-com bubble burst.

In 1987, prices rose so fast, valuations increased 43 percentthrough August, about twice the pace of the year before. That monthmarked the peak in a five-year rally, followed by a 34 percent lossthrough December 1987.

U.S. equities have been whipsawed since May, when Fed ChairmanBen S. Bernanke first indicated that the central bank may start toreduce its quantitative easing bond buying this year. The S&P500 fell 5.8 percent from a high on May 21 through June 24 andrallied 8.7 percent through Aug. 2, before declining 2.7percent.

Corporate earnings need to accelerate to justify the surge inequities as the central bank begins to scale back its unprecedentedmonetary stimulus, according to Joost van Leenders of BNP ParibasInvestment Partners in Amsterdam.

“There's been a lot of hope and expectations that things willimprove in the second half,” Van Leenders, who helps oversee $660billion as a strategist at BNP Paribas, said by phone on Aug. 22.“The improvement in earnings growth has been delayed from the thirdquarter to the fourth quarter. Not many companies are givingforward guidance, and those that are, are giving negativeoutlooks.”

While U.S. stocks may be in the final leg of a bull market,that's often the stage with the biggest gains as bears capitulate,according to Laszlo Birinyi, president of Birinyi Associates Inc.In this last phase, which Birinyi calls exuberance, equity marketshave surged 39 percent on average.

Birinyi, one of the first money managers to advise clients tobuy in 2009, wrote in a Aug. 7 report that the rally in U.S.equities was poised to slow after the 17 percent surge this year.He predicted that the S&P 500 may climb to a new high of 1,740by December, 4.6 percent above the current level. The S&P 500exceeded Birinyi's forecast of 1,600 in May.

Previous Peaks

Even as the S&P 500 valuation expanded this year, it remainsbelow the level at which previous rallies peaked. The averagemultiple during bull runs since 1957 has been 17.4 times reportedprofits, about 10 percent higher than today's ratio, data compiledby Bloomberg show. Advances ended at 20.2 times earnings onaverage, 26 percent higher than the present level.

“It's more important how high the valuation is than how long ittook to get there,” Russ Koesterich, the chief investmentstrategist at New York-based BlackRock Inc., said by phone on Aug.22. BlackRock is the world's largest money manager, with $3.8trillion in assets. “Valuations today are below where they were in2007 and much, much below their levels in 2000.”

The S&P 500 traded at 17.5 times earnings when the index hita high of 1,565.15 on Oct. 9, 2007, Bloomberg data show. Thevaluation reached 31 times income in March 2000 as it peaked at1,527.46.

Consumer-discretionary companies posted the biggest multipleexpansion out of 10 S&P 500 industries in the last 12 months,with the valuation for the group surging 39 percent, data compiledby Bloomberg show.

Investors have paid up for stocks in anticipation that earningsgrowth will rebound, and companies must now deliver for theequities rally to continue, according to Franz Wenzel, who helpsoversee $759 billion as a strategist at Axa Investment Managers inParis.

“Over the last two years we saw equity markets jump throughliquidity and re-rating; this story is behind us,” Wenzel said byphone on Aug. 21. “We don't think further multiple expansion isfeasible. We need the economic underpinning.”

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