The S&P 500, which jumped more than 2 percent on Thursday, ended above 1,700 for the first time since late September.
Buyers on Friday were motivated by the chance an agreement could come over the weekend. The Senate is expected to vote over the weekend on extending the federal debt limit through January 2015.
President Barack Obama and congressional Republican leaders worked to end a fiscal impasse that would allow a reopening of the federal government and an increase in the U.S. debt limit.
"People don't want to be short going into a weekend, especially if a deal does get done," said Dennis Dick, proprietary trader at Bright Trading LLC in Las Vegas.
The partial shutdown is now in its eleventh day and less than a week remains before an October 17 deadline to extend the government's borrowing authority and avoid a debt default.
All S&P sectors were up except consumer staples, which fell slightly. Energy stocks .SPNY led the S&P 500, rising more than 1 percent after the Environmental Protection Agency proposed lowering the required amount of ethanol to be blended into U.S. gasoline after Thursday's market close.
The CBOE Volatility index VIX .VIX, Wall Street's so-called fear gauge, closed down 4.6 percent at 15.72, the lowest in nearly two weeks.
"This rally will provide the opportunity to modify positioning, as we expect fundamentals to matter more as the credit cycle turns," said Peter Cecchini, managing director at Cantor Fitzgerald in New York, writing in a note to clients.
The Dow Jones industrial average .DJI was up 111.04 points, or 0.73 percent, at 15,237.11. The Standard & Poor's 500 Index .SPX was up 10.63 points, or 0.63 percent, at 1,703.19. The Nasdaq Composite Index .IXIC was up 31.13 points, or 0.83 percent, at 3,791.87.
For the week, the Dow rose 1.1 percent, the S&P 500 rose 0.7 percent while the Nasdaq fell 0.4 percent as some of the strongest gainers in the tech sector sold off during week as investors were taking profits.
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