By Akane Otani 

U.S. investors are betting on the strength of the domestic economy offsetting ruptures in global trade and emerging markets, as stocks moved to within a whisker of all-time highs Wednesday.

The rally lifted the S&P 500 and Dow Jones Industrial Average to within 0.2% and 0.8%, respectively, of their records.

The gains reflect a market environment in which the negatives for stocks are proving to be less frightful for investors and the underpinnings of the nine-year-old bull market remain strong.

Although the continuing trade dispute between the U.S. and China has rattled investors in recent months, the latest round of tariffs was less severe than investors had feared. Emerging markets have shown signs of stabilizing after sliding earlier in the month.

Next week's Federal Reserve meeting has stirred little nervousness, largely because many investors view another potential interest-rate increase as testament to the economy's vigor. Reflecting this perspective, yields on the benchmark 10-year U.S. Treasury note rose to 3.081% Wednesday, the highest since May.

Meanwhile, the unemployment rate is hovering at the lowest level since 2000, wage growth is accelerating and corporate earnings look set to extend a streak of double-digit gains in the third quarter.

"Many people are thinking the U.S. economy is on such a roll, that why would they need to go elsewhere?" said JJ Kinahan, managing director and chief markets strategist at TD Ameritrade.

The market's latest run at records has brought the S&P 500's 2018 gains to 8.8%, a remarkable divergence from major indexes in Europe and Asia, many of which have fallen into negative territory for the year. The Dow industrials rose 158.80 points, or 0.6%, to 26405.76 Wednesday, while the S&P 500 gained 0.1%.

Underneath the rally, though, are changes in investor behavior and the stocks propelling it. New sectors have gained, and previous top performers have languished.

In September, the biggest gainers in the S&P 500 include companies focusing on telecommunications services and consumer staples -- so-called safe sectors whose steady dividend payouts have long made them investor favorites when markets are volatile or declining. These shares typically lag behind major indexes during rallies, in part because they are perceived to offer limited potential gains.

But in September, telecom shares are up 1.7% and consumer staples are up 1.4%, beating a 0.2% increase in the S&P 500.

Some companies, such as Hershey Co., have rallied after increasing their dividend payouts. Others have jumped on industry-specific news: Cigarette makers Philip Morris International Inc. and Altria Group Inc. increased after the head of the Food and Drug Administration said he was considering banning flavored e-cigarettes from the U.S., while Corona brewer Constellation Brands Inc. rose after saying it was investing money in a Canadian marijuana grower.

Many of the shares that powered the Dow industrials, S&P 500 and Nasdaq Composite to highs earlier in 2018 have tumbled this month. Apple Inc., Amazon.com Inc. and Alphabet Inc. each has declined at least 4% in September, partly reversing double-digit percentage gains for the year. Facebook Inc. has declined more than 7% this month, adding to its retreat in the second half of this year.

"As August ended and we rolled into September, there's been a natural inclination towards more defensive sectors," said Michael Arone, managing director and chief investment strategist at State Street Global Advisors. "We're continuing to see the struggle between the China hawks [in the White House] and those who want to put the trade dispute behind them."

Beyond the bond proxies, there are other signs of investors taking out protection against a pullback.

Investors are holding about 5.1% of their portfolios in cash, the highest share in 18 months, according to Bank of America Merrill Lynch's monthly global fund-manager survey.

To many, the moves reflect nervousness as investors get deeper into what has often been a rocky period for the stock market. September has historically been the worst month of the year for the S&P 500, according to investment research firm CFRA, which studied market returns going back to 1945.

This year has been no exception. Technology stocks, the best-performing sector in the S&P 500 for the year, broadly retreated after Facebook and Twitter Inc. executives testified before Congress earlier in the month. The tech sector is down 2% in September, on pace for its worst month since March.

Yet some analysts are skeptical the rally in so-called safety trades is sustainable.

The Fed is widely expected to raise short-term interest rates by a quarter percentage point when it meets next week. That could put fresh pressure on both U.S. government bonds and their stock-market proxies, which typically lag behind market indexes in a rising-rate environment.

After being up 1.5% for the month through Tuesday, the S&P 500 utilities sector slid Wednesday, erasing its September gains. Treasurys also remain weaker for the year.

Another factor that could slow the bond-proxy rally: lackluster earnings growth. The consumer-staples sector is expected to post the slowest earnings growth of the S&P 500's 11 groups in the third quarter, followed closely by the real-estate and utilities sectors.

But for now, few analysts see the factors that have kept investors on guard disappearing soon. The possibility of the trade fight escalating will likely keep optimism reined in for now.

Just 32% of individual investors believe the stock market will be higher in six months, according to data through Sept. 12 from the American Association of Individual Investors. That is down 10 percentage points from the prior week and below the historical average of 39%.

"The wild card is the tariffs and if they end up actually changing the narrative and pushing the U.S. economy lower," said Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management Co.

Write to Akane Otani at akane.otani@wsj.com

(END) Dow Jones Newswires

September 19, 2018 19:39 ET (23:39 GMT)