US stocks rallied and the S&P registered its highest close of the year on Friday, starting December on an upbeat note as remarks from Federal Reserve Chair Jerome Powell bolstered the view that key policy rates have peaked.

All three major U.S. stock indexes advanced, with economically sensitive transports and smallcaps enjoying the most robust gains.

"Those sectors - the cyclicals - they're the most hated parts of the market year-to-date, (and they) are the parts that are leading," said Scott Ladner, chief investment officer at Horizon Investments in Charlotte, North Carolina. "On the first day of December, when everybody's looking for a Santa Claus rally, it probably carries a little bit of extra weight."

"If December starts out strong, it's going to make folks jump on board and chase this rally," Ladner added.

All three indexes notched their fifth consecutive weekly percentage gains. On Thursday, they wrapped up a banner month in which the S&P 500 and the Nasdaq registered their biggest one-month percentage gains since July 2022, and the Dow closed at its highest level since January 2022.

In prepared remarks, Powell acknowledged the central bank's need to "move forward carefully" amid signs of economic softening, as the risks of over- and under-tightening its monetary policy are becoming more balanced.

"Earlier in the week, (Fed Governor Christopher) Waller, one of the Fed's biggest hawks, said as inflation decreases, we're going to drop rates," Ladner said. "The market thought that Powell would push against those remarks, and he didn't.

"(Powell) is setting the market up for rate cuts next year."

Data released on Friday showed US manufacturing continues to contract as factories contend with decreasing new orders, falling inventories and labour pressures.

The Dow Jones Industrial Average rose 294.61 points, or 0.82 percent, to 36,245.5, the S&P 500 gained 26.83 points, or 0.59 percent, at 4,594.63 and the Nasdaq Composite added 78.81 points, or 0.55 percent, at 14,305.03.

Among the 11 major sectors of the S&P 500, real estate was the biggest percentage gainer, while communication services was the sole decliner. (Reuters)