U.S. stock markets closed higher on Friday, capping off the strongest week of 2024 for the S&P 500 and Nasdaq Composite, as investors looked ahead to the Federal Reserve's crucial meeting next week, where the fate of potential interest rate cuts will be determined.

The S&P 500 gained 0.54 percent, closing at 5,626.02, less than 1 percent away from its all-time high set in July. The Nasdaq Composite rose 0.65 percent to finish at 17,683.98. Both indices notched their fifth consecutive winning session. Meanwhile, the Dow Jones Industrial Average jumped 297.01 points, or 0.72 percent, to close at 41,393.78. All sectors traded in positive territory, led by utilities, real estate, and consumer goods, while communications services and industrials also posted notable gains of roughly 1 percent.

On a weekly basis, the S&P 500 climbed 4 percent, while the Nasdaq surged 5.9 percent, making it their best performance of the year. The Dow also advanced 2.6 percent for the week. This rally reflects growing optimism that the Federal Reserve may move towards cutting interest rates at its upcoming Federal Open Market Committee (FOMC) meeting on September 17-18. Market expectations for a 50-basis-point rate cut have risen sharply, with odds now sitting at 49 percent, compared to just 15 percent a week earlier. Most analysts, however, still expect a more conservative 25-basis-point cut.

This shift in sentiment has been driven by favourable economic data released this week. U.S. inflation has continued to moderate, with the Consumer Price Index (CPI) showing only modest increases, while the latest jobs report revealed slower-than-expected job growth, bolstering the case for monetary easing. Investors have been clamouring for rate cuts, arguing that the U.S. economy is well-positioned for lower rates, given the improving inflation outlook and softer labour market.

If implemented, this would mark the Federal Reserve's first rate cut in over four years. However, there is growing speculation that the Fed may opt for a two-step approach, enacting a smaller cut now, with the possibility of another reduction by year-end, especially as the U.S. presidential election draws near. Analysts caution that a deeper cut could present risks, not only for the economy but also politically, as it could be seen as interfering with the election cycle.

Global economic factors have also played a role in shaping investor sentiment. Uncertainty overgrowth prospects in China, ongoing geopolitical tensions, and a relatively stable dollar have made U.S. markets an attractive for the investors. Despite these uncertainties, the overall outlook remains cautiously optimistic as traders await the Fed's decision, which could set the tone for the rest of the year in financial markets. The sectors like technology and utilities, which are sensitive to borrowing costs, are likely to be impacted by any shifts in policy.

The outcome of next week's meeting could have significant implications not only for domestic markets and interest rates, but for broader market dynamics, across globe.