Will rising interest rates cause a collapse in stock valuations this year? It's a question investors have been struggling to answer, as evidenced by the selling that greeted testimony from Alan Greenspan Tuesday, which appeared to move the economy one step closer to a rate hike. Greenspan -- who is scheduled to address Congress again Wednesday -- told the Senate Banking Committee that signs of deflation have dissipated and the financial system looks properly braced for a monetary tightening. Tuesday's stock market action illustrated the specific concern about valuations. While the pain of higher interest rates is conventionally thought to land most squarely on economically sensitive companies, it has been the high-priced Nasdaq -- which fell 2.1% Tuesday to the Dow's 1.2% dip -- that has borne the brunt of selling since rate jitters first started spreading in late January. Bulls argue that if the Federal Reserve raises rates over the summer, it will be a sign that the economy is getting better. This, in turn, suggests that earnings will accelerate and that investors will pay a higher price for stronger growth. Bears, on the other hand, say price-to-earnings multiples and interest rates always move inversely. They argue that P/Es will contract as rates rise, because investors won't be willing to pay the same price for the same amount of earnings when other investments, such as bonds, are suddenly yielding more. For example, let's say XYZ stock is trading for $10 and produces 50 cents in annual earnings. If the 10-year Treasury is yielding 3.75%, XYZ's earnings yield of 5% might seem reasonable. But if the 10-year note shot up to 4.5% because of expectations for a Fed rate hike, XYZ suddenly becomes less desirable. Several analysts also point out that the price of a stock is the discounted present value of the future dividends to investors. In other words, when interest rates go up, the present value of future cash flows goes down, and the P/E should fall. Of course, higher interest rates can have a direct impact on the bottom line, as corporate borrowing costs creep higher. And Tom McManus, equity analyst at Banc of America, notes that low interest rates have stimulated demand for such items as homes and cars. As rates move up, he said, this demand could well fall off. "I think if rates do rise, even in a strengthening economy, over the medium term it would probably lead to some P/E compression," said Cliff Asness, principal at AQR Capital Management.