While stocks are up some 60% from their March lows, author and Wharton Professor Jeremy Siegel says the rally is “far from exhausted”.

In his column on Yahoo! Finance, Siegel says that stocks may appear to be overvalued using 2009 projected earnings per share. According to those projected EPS, the S&P 500 has a P/E ratio of about 19, above the historical average of about 15. “But basing stock values on 2009 earnings is inappropriate,” Siegel says. “2009 marked the bottom of the worst recession since World War II. What is relevant for determining stock values are future earnings, not past earnings.” Next year’s S&P 500 operating earnings are projected to be $74.34 a share, he says, which makes for a 14.4 P/E given the S&P’s current level. And early 2011 estimates are $89 per share, which makes for a P/E of about 12.

Another factor to consider, according to Siegel: productivity. Productivity increased by a 6.9% annual rate in the second quarter and 9.5% in the third quarter, the fastest two-quarter increase in 40 years, Siegel says. “Since labor costs are the lion’s share of most firms’ expenditures,” he says, “raising output through productivity growth means more revenue for given labor costs, and it raises earnings. If rapid productivity growth continues, stocks could quickly surpass their record high $91.73 level reached in 2007 before the recession began.”

Siegel also says current low interest rates represent another reason to be bullish. “Historical data confirm that the lower the rate of interest, the higher the valuation of stocks for any level of earnings,” he writes. “This is true because bonds compete with stocks in investors’ portfolios, and the lower the interest rate, the higher the fraction of stocks investors want to hold.” He says his research shows that when inflation and interest rates are low, stocks sell on average at 18-20 times earnings. “An 18 P-E ratio on 2010 estimated earnings of $74.34 for the S&P 500 is 1340, more than 25 percent above current prices,” he says.