Not familiar with Mode S but assuming that it is altitude encoding the same as Mode C. A transponder gives ATC a clear view of your altitude and makes you a brighter blip on their screens thirdly and more importantly it allerts big jets TCAS systems so that you don't get sucked into their fans. Certainly whilst flying in busy airspace it is my experience that it is useful for ATC to be able to give you the altitude of possibly conflicting aircraft. A little more peace of mind.