With all eyes on the upcoming U.S. election and the ongoing sovereign debt situation in the eurozone, BMO Harris Private Banking’s latest market outlook notes that modest economic improvements, combined with anticipation of additional stimulus measures, in the United States and Europe have bolstered investor confidence and contributed to positive equity market returns.

The report notes that more optimistic economic data has emerged from the U.S. BMO Harris describes the pace of growth as steady, and will likely continue at a modest pace over the next 12 to 18 months as the U.S. government tackles its debt and reduces spending.

As well, the U.S. housing market improved over the summer and in the services sector continued to expand in August.

On the employment front, the report notes that job creation in August was less than expected, but greater than average monthly rate during the second quarter of 2012.

In addition, U.S. stocks have outperformed world equity markets by a wider margin than in the past 14 years as a result of relatively attractive valuations.

“As we near the end of Q3, we have reason to be optimistic that the poor economic results we witnessed in Q2 were the exception rather than the beginning of a new trend,” says Richard Mason, head of investment management at BMO Harris Private Banking. “A critical factor in the coming months will be the outcome of the U.S. election and the impact of the tax and spending debates that will be needed to address the country’s fiscal cliff.”

The report notes that the credit situation in Europe and its impact on business, consumer and investor confidence has modestly improved, but “establishing a resolution will be a slow process,” says Mason.

Slower European growth is having a negative impact on China. However, BMO Harris says China’s policymakers appear committed to stimulating enough growth to engineer a soft landing for their economy.

“With a change in Chinese leadership underway, we expect further policy decisions to be made over the coming months in support of economic growth,” adds Mason.