The rate-sensitive S&P 500 real estate and utilities sectors had their biggest daily percentage gains since November 2022, and the small-cap Russell 2000 index outperformed the broader market.

Data showed U.S. consumer prices were unchanged in October as Americans paid less for gasoline, and the annual rise in underlying inflation was the smallest in two years. In the 12 months through October, the CPI climbed 3.2% - below economists' estimates - after rising 3.7% in September.

"The clear catalyst was the softer-than-expected inflation report," said Craig Fehr, head of investment strategy at Edward Jones.

"Getting some softer inflation readings provided markets some additional comfort that the Fed isn't going to have to put in place a significant amount of additional restrictive policy to continue to bring consumer prices lower."

Since March 2022, the Fed has hiked its policy rate 525 basis points to combat high inflation.

According to preliminary data, the S&P 500 gained 84.48 points, or 1.91%, to end at 4,496.03 points, while the Nasdaq Composite gained 325.03 points, or 2.36%, to 14,094.38. The Dow Jones Industrial Average rose 488.84 points, or 1.42%, to 34,826.71.

Investors also focused on negotiations by U.S. lawmakers over a funding bill as they face an end-of-week deadline to fund the federal government.

Among individual stocks, Snap Inc shares jumped following news that Amazon.com will allow Snapchat users in the United States to buy some products listed on the ecommerce company directly from the social media app.

Home Depot gained after the U.S. home improvement chain beat quarterly profit estimates.