Several top-performing fund managers say they are now positioning for arally in the U.S. stock market

Tighter monetary policytypically dents a country's equity markets. But severaltop-performing fund managers say they are now positioning for arally in the U.S. stock market should the Federal Reserve raiseinterest rates in September as expected.

Their reasoning: That if the U.S. economy truly is strongenough for the Fed to raise rates for the first time since 2006,then the effect of higher borrowing costs should be more thanoffset by a pickup in economic growth and resulting rise incorporate profits.

At the same time, many see declining bond prices pushingmore investors to stocks.

"As long as inflation stays low, the sweet spot is in theequity market, particularly if the Fed is moving slowly," saidKathleen Gaffney, co-director of diversified fixed income andmanager of the $1.8 billion Eaton Vance Bond Fund.

"This is one of our best sources of return right now and areally good source of liquidity if we do get some hiccups in thefixed income market," she added.

Gaffney, whose fund is capped at 20 percent equities, has 18percent of her portfolio in established large-cap stocks likeWalt Disney Co and Humana Inc (NYSE: HUM - news) that have stabledividends.

Few fund managers expect the path to be smooth, of course.

The benchmark Standard & Poor's 500 is up just 2percent for the year, reflecting anxiety about the prospect ofhigher rates. Many remember the "taper tantrum" of 2013, whenthe index fell more than 7 percent in a month on the prospect ofless central bank stimulus for the economy.

Nor is a rate hike, or stock rally, guaranteed later thisyear. "Every time everyone starts to believe that the economy isgood and a rate hike is around the corner, the market has gonethe other direction," said Sadiq Adatia, chief investmentofficer at Sun Life Global Investments.

The Fed will issue its latest policy statement at 2 p.m. EDT(1800 GMT) on Wednesday after a two-day meeting. It is expectedto leave interest rates unchanged.

SHORT-TERM VOLATILITY

Several of this year's top-performing fund managers foreseefurther stock gains.

Connor Browne, a co-manager of the $1 billion ThornburgValue Fund, has been trimming positions in high-flying biotechstocks such as Gilead Sciences Inc (NasdaqGS: GILD - news) and Zoetis Inc (NYSE: ZTS - news) in order to have cash on hand to buy stocks if themarket has a brief sell-off when the Fed announces its plan.