NEW YORK (Reuters) - U.S. stocks rallied on Friday to close out a strong week on optimism over the health of the economy and path of interest rates as investors braced for a slew of policy changes under the incoming Trump administration.

The S&P 500 and Dow Industrials registered their biggest weekly percentage gains since early November and the Nasdaq recorded its best since early December. Data this week allayed fears that inflation would resurge while expectations have grown that the Federal Reserve will bump up the timing and magnitude of rate cuts this year.

The Commerce Department reported on Friday that U.S. single-family homebuilding rose to a 10-month high although demand will likely be curbed by rising mortgage rates and an oversupply of new properties.

A separate report revealed a surge in manufacturing output last month.

President-elect Donald Trump will be inaugurated on Monday, when U.S. markets are closed for the Martin Luther King Jr. Day holiday.

Uncertainty over the potential for some of Trump's policies such as tariffs to rekindle rising inflation pressures and slow the path of Fed rate cuts has weighed on equities in recent weeks.

But a solid start to the corporate earnings season with results from many big banks has also helped buoy stocks this week, with the S&P 500 bank index up 7.41% on the week.

"Stronger growth, feeding into better corporate earnings, you're kind of getting off to a start to the year here that there's plenty of questions both in terms of fiscal and monetary policy and what the Trump agenda will look like, or what shape it will take," said Jim Baird, chief investment officer at Plante Moran Financial Advisors in Southfield, Michigan.

"Despite all those questions, we're starting the year on a reasonably better footing than we've been on perhaps in the last few years."

The Dow Jones Industrial Average rose 334.70 points, or 0.78%, to 43,487.83, the S&P 500 gained 59.32 points, or 1.00%, to 5,996.66 and the Nasdaq Composite gained 291.91 points, or 1.51%, to 19,630.20.

For the week, the Dow rose 3.69%, the S&P gained 2.92% and the Nasdaq climbed 2.43%.

The benchmark U.S. 10-year note yield edged up 1.3 basis points to 4.619%, but has eased off a 14-month high of 4.809% hit earlier this week.

Cleveland Fed President Beth Hammack said inflation remains a problem as recent data has pointed to a resilient economy. However, Fed Governor Christopher Waller indicated on Thursday the central bank could cut rates sooner and faster than expected as inflation is likely to continue to ease.

The Fed is widely expected to keep rates steady at its policy meeting later this month, with the markets pricing in a greater than 50% chance for a cut of at least 25 basis points until June, LSEG data showed.

Nine of the 11 S&P 500 sectors rose, led by a 1.7% rise in consumer discretionary stocks, while healthcare and real estate declined.

Nvidia gained 3.1% and Broadcom advanced 3.5% after Barclays raised its price targets on the stocks, helping to boost the PHLX semiconductor index by 2.84%.

In addition, Intel surged 9.25% on speculation of a takeover and Qorvo shot up 14.43% after activist investor Starboard Value disclosed a 7.7% stake in the chipmaker.

Shares of social media firms such as Meta had a muted reaction after the Supreme Court ruled against TikTok's challenge to a law that would force its app's sale or ban in the United States. Meta shares edged up 0.24% while Snap dipped 3.21%.

Advancing issues outnumbered decliners by 2.16-to-1 on the NYSE and by 1.73-to-1 on the Nasdaq.

The S&P 500 posted 24 new 52-week highs and no new lows, while the Nasdaq Composite recorded 66 new highs and 73 new lows.

Volume on U.S. exchanges was 14.57 billion shares, compared with the 15.65 billion average for the full session over the last 20 trading days.