NEW YORK, Dec 1 (Reuters) - U.S. stocks rallied on Friday, with the S&P 500 registering its highest close of the year, as comments from Federal Reserve Chair Jerome Powell indicated that key policy rates may have peaked. The positive sentiment was further supported by gains in the economically sensitive transport and small-cap sectors.

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

Investors were particularly encouraged by Powell's prepared remarks, in which he acknowledged the need to proceed cautiously, given signs of economic softening. Powell emphasized the importance of striking the right balance in monetary policy to avoid over- or under-tightening.

"The market thought that Powell would push against those remarks, and he didn't," noted Scott Ladner, Chief Investment Officer at Horizon Investments in Charlotte, North Carolina. "He is setting the market up for rate cuts next year."

The positive performance of the stock market in December is seen as potentially propelling a Santa Claus rally as market participants look to build on the momentum. It marks the fifth consecutive weekly gain for all three major indexes.

In terms of sector performance, real estate emerged as the top gainer among the 11 major sectors of the S&P 500, while communication services was the only sector to decline.

Among individual stocks, Marvell Technology experienced a decline of 5.3% after its fourth-quarter revenue projection fell short of Street estimates.

The strong rally in U.S. stocks caps off a successful month, with the S&P 500 and Nasdaq registering their largest one-month percentage gains since July 2022. The Dow also closed at its highest level since January 2022.

Looking ahead, investors will closely monitor the Federal Reserve's stance on rate cuts next year, given Powell's indication that the risks of over-tightening and under-tightening monetary policy have become more balanced.

Overall, the optimism in the market, supported by Powell's remarks, is expected to drive further participation and potentially lead to a continued rally in the coming weeks.

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