The action is short of an actual upgrade but nevertheless reflects increasing confidence in Latvia's economic prospects.
"The positive outlook reflects our view that we could upgrade Latvia if economic expansion ensues without overheating, external risks abate over the medium term, and government debt continues to decline," said S&P in a release explaining the thinking behind its decision.
"The outlook revision reflects our expectation that Latvia's current fast economic expansion will be coupled with structural improvements of the country's labor market, which would help sustain higher income levels following the current cyclical surge in growth. We expect fiscal prudence to be maintained despite tax reform and upcoming elections next year," the agency said.
It also signalled that if things stay on track, an actual upgrade might not be far away, saying that such a move would depend upon various factors including declining external debt (particularly short-term debt "which reflects external vulnerabilities stemming from the structure of the financial sector").
However, there was also a note of caution with S&P saying the outlook could be revised back to stable if the economy under-performs due "rapidly worsening demographics" or "substantial fiscal slippage."
Nevertheless, the news will be a fillip to Finance Minister Dana Reizniece-Ozola as work on the 2018 budget reaches an important point.
The agency also said it expected Latvia's economy to grow by more than 4% in 2017-18 and that GDP per capital would reach nearly $17,000 dollars by the end of 2018.