It's that time of year when chief investment officers from firms big and small start churning out their midyear reports, reflecting on the half year that was and predicting what might happen in the half year that's about to begin. What can we glean from these reports? What course adjustments might we make to our investment ship?

Well, here's a look at what's crossing the transom.

Investors, pundits say, will face more challenges in the second half of the year than they have in the first half. The markets are likely to remain "on edge" throughout the remainder of 2012, Russ Koesterich, the global chief Investment strategist for BlackRock's iShares business, said in a release yesterday.

Others share that sentiment. Stuart Freeman, the chief equity strategist at Wells Fargo Advisors, said in his midyear report that the markets will be "choppy" for the rest of 2012

But even with "rocky," and "choppy" markets, advisers also think that the outlook for U.S. stocks is positive through the end of the year.

James Swanson, chief investment strategist at MFS Investment Management, for instance, said in a recent conference call that there are reasons to be optimistic. One, the drivers of the current business cycle are positive. Corporate profit margins, consumer spending, the housing market, and car sales are all rising, from his perspective.

What's more, Swanson said, the U.S. stock market seems cheap compared with historic norms. "A typical stock market cycle sees a 188% rise from a recessionary low, and we are only halfway through that period," he said.

Freeman also said the market has the potential to move higher -- it's the second leg of this cyclical bull market. He predicted in Wells Fargo's 2012 Midyear Economic and Market Outlook report that the operating earnings of the Standard & Poor's 500 index will rise 6% to 7% and he's looking for the S&P 500 to close the year between 1,400 and 1,450. His rationale for that forecast: Job growth, consumer confidence, a resilient U.S. economy, and increased liquidity world-wide all bode well for stocks.

Given all that, where might you invest? Swanson is recommending high-quality large-cap stocks, technology stocks and dividend-paying stocks.

Koesterich also views dividend-paying stocks at the place to be for the remainder of 2012. "We prefer the relatively low beta of high dividend stocks -- both in developed and emerging markets -- and using any market weakness as an opportunity to add to longer-term positions in emerging markets," Koesterich said in a release. Besides attractive yields, dividend stocks are generally less volatile than the broader market, he said.

Freeman is telling investors to overweight the following sectors of the Standard & Poor's 500 index: consumer discretionary, information technology, materials and telecommunications.

In the fixed-income space, Koesterich is bullish on municipal bonds and U.S. corporate bonds, particularly investment grades.

GDP at 2%

As for the economy, Swanson noted that economic expansions since World War II have lasted on average 59 months -- nearly five years. The current economic expansion is at 35 months, which means there could be another two years of expansion. "We're roughly halfway or in midcycle here, not at the end of a cycle," said Swanson according to a transcript of the conference call.

To be sure, Swanson said, this cycle of economic growth may not be up to politicians' standards of 4% growth, which was seen in the '80s and '90s, recoveries and expansions. It's just 2%. "But this 2% is organic and sustainable in that it's not being fueled by debt spending at corporate or consumer levels," he said. "Government level, yes, but the government's actually not growing in terms of payroll. So the sustainability of the cycle, to me, is intact because ... we are not witnessing a credit cycle."

Koesterich also seems to think that growth in the U.S. is unlikely to be better than 2%. But he also said potential year-end tax hikes and spending cuts in the U.S. could create more than $600 billion in "fiscal drag," or the equivalent of roughly 4% of GDP. And if the fiscal drag were to occur, Koesterich believes a double-dip recession becomes much more likely and that's not something investors are anticipating.

Europe emerges from its recession in three quarters

Europe has problems for sure. But, according to Swanson, its recession will be shallow, not nearly as deep as in 2008. Plus, the leaders of the European Central Bank have been able to keep the euro zone together in the short term with band aids and temporary solutions.

According Swanson, Europe biggest issue at the moment is not necessarily too much debt in the peripheral countries. Rather the bigger and more fundamental problem to be addressed is high-unit labor costs and labor inefficiency, he said.

"The number one problem, and it's important to understand the root cause of the problem in Europe, is a unit labor cost problem," Swanson said. "Europe has been losing its share of the world export markets for years."

And that's likely to continue. "It's impossible to grow if you can't gain share of the export markets, and if your biggest cost component is labor," he said. "So what the democracies in Europe have done as Europe has gotten less competitive, has made more promises to the electorate, and often in conjunction with an coming election, to promise better conditions, shorter workweeks."

Yes, there have been some labor reform proposals in European countries that could help reverse this trend, but none suggest to Swanson a "permanent solution to the European problem, which in my opinion, is to grow your way out of a growing debt problem, you need to be competitive, and they're not."

China's slowing, but not crashing

According to Swanson, the Official China manufacturing employment subindex, though volatile, is as good a guide as there is to figuring out the state of the Chinese economy. And at the moment "it's holding up," Swanson said.

There are two reasons why China is holding up: First, the current slowdown is related in part to recession in Europe, but more due tight monetary policies of the People's Bank of China of a year ago. With China lowering interest rates and providing liquidity, Swanson predicts, we'll see the fruits of this in five to six months, 10 months, tops.

Second, he said, the "big threats to emerging market economies, the inflation scare, particularly in agriculture, has subsided with record crops and a return to a more normal weather patterns."

So, he predicts growth in emerging market to resume closer to trend by year-end in the major emerging market countries, such as Brazil and India.

Swanson also said he's impressed by the number of credit upgrades in the emerging markets. "In our view, you want to own credits that are improving, and even in a slowdown, debt per capita, debt to GDP, fiscal reserves, corporate governance improvements in these countries continue to be on a momentum positive role," he said.

Also, Swanson noted that global emerging market countries have on average a forward PE of 16. Right now, however, the PE is 11.4. "These emerging market equities are cheap from a historic basis, and if they do recover, it does seem that the market's already priced in a recession or a steep slowdown in this world," he said.

Koesterich recommends overweighting emerging markets. The reasons why: there's a longer-term trend toward less volatility, stronger economic growth, falling inflation and more compelling valuations.