Investors snapped up shares in the final hour of trading after Republican Congressional leaders proposed a three-month extension in the $16.4 trillion (£10 trillion) debt ceiling. The plan, which will be voted on next week, requires the House of Representatives and the Senate to pass a formal budget for the first time in three years. Although the planned extension does not represent a debt deal that tackles taxes and spending, it does at least delay a political fight over the ceiling that threatened growth and confidence.
The US government hit its self-imposed debt ceiling on December 31 and has since been using emergency measures to pay its bills. Those measures are expected to run out sometime next month.
The Dow Jones closed up 0.4pc at 13,649.70, its highest close since December 2007. Meanwhile, the S&P 500 finished 0.3pc stronger at 1,485.98.
Wall Street had been buoyed earlier in the day by stronger than expected profits from both Morgan Stanley and General Electric.
A 7.5pc jump in fourth-quarter profits at General Electric has lifted optimism about the prospects for the global economy, after the US conglomerate saw demand rise in industries from gas and oil to aerospace.
The company, which investors regard as a bellwether for the world economy because of the breadth of its operations, saw its backlog of orders reach a record $210bn in the final three months of last year. Fourth-quarter profits climbed to $4.01bn from $3.73bn.
Morgan Stanley returned to profit in the quarter thanks to a strong performace from its brokerage business.