The outlook for U.S. stocks in the second half of 2022 is very uncertain primarily as a result of the highest inflation in 40 years, with the CPI registering an 8.6% increase over the past 12 months, along with the economic impact of Russia’s invasion of Ukraine which has led to a substantial increase in the price of oil. In order to reduce inflation, at its June 15, 2022 meeting, the Federal Open Market Committee (FOMC) increased the Federal Funds rate by an aggressive 75 basis points to 1.50 – 1.75% and projected it would increase it to 3.4% by yearend 2022, and to 3.8% in 2023. Since equity prices are primarily determined by interest rates, the S&P 500 index has declined by 23% year-to-date as interest rates have been moving higher. The economy is projected to slow down as a result of the FOMC raising interest rates to reduce demand and, therefore, inflation. Corporate profits, another major determinant of equity prices, are expected to weaken in the second half of 2022. There appears to be at least a 50% probability of a recession occurring in 2022 or 2023.

Investors should have at least a 5 – 10 year time horizon. The S&P 500 (with dividends included) has had a positive return in 80% of the years from 1942-2021, and has had a compounded annual return of 10% since 1928. Although past performance is no guarantee of future outcomes, it is likely that the overall market as measured by the S&P 500 would continue to increase at its historic 10% rate (dividends included) in the years ahead as both GDP and corporate profits continue to grow.

Of the 12 stocks recommended at the beginning of 2022 (Seeking Alpha), 11 have declined and only one showed a positive return (Teck Resources + 26.5%). The overall portfolio declined 26.6% year-to-date, which puts it approximately in the middle between the S&P 500 (-22.9%) and Nasdaq (-31.0%).

Against this bear market background, I recommend an equally-weighted portfolio of 14 stocks for midyear 2022, which include 6 new picks and 8 stocks previously recommended at the beginning of 2022.

The 6 new recommendations are:

Activision Blizzard (ATVI): This is merger arbitrage recommendation. Microsoft has agreed to acquire ATVI at $95 per share, which represents a 27% premium over ATVI’s current price of $75. This transaction is expected to close within one year but is subject to regulatory (antitrust) approval in the U.S. and EU. Berkshire Hathaway (Warren Buffett) has taken a $5 billion stake in ATVI during the first quarter of 2022.

Chevron (CVX): A beneficiary of high oil prices and an excellent hedge against inflation, Berkshire Hathaway (Warren Buffett) has taken a $26 billion stake. It is now the fourth largest equity holding in Berkshire’s portfolio.

Citigroup (C): Currently trading at a price/earnings ratio of 5 and near a 12-month low, Berkshire Hathaway (Warren Buffett) has taken a $3 billion stake during the first quarter of 2022.

Occidental Petroleum (OXY): Another beneficiary of high oil prices and an excellent hedge against inflation, Berkshire Hathaway (Warren Buffett) has taken a 15% stake in the company ($8 billion). OXY has a price/earnings ratio of 8.

Paramount Global (PARA): Formerly ViacomCBS, Berkshire Hathaway has taken a $2.6 billion stake. It is currently trading at a price/earnings ratio of 5.

Twitter (TWTR): This is a merger arbitrage recommendation. Elon Musk has agreed to acquire TWTR at $54.20 per share. This represents a 31% premium over TWTR’s current price of $37.

The 8 repeat recommendations from January 2022 are:

Alphabet (GOOG, GOOGL): The growth prospects for this search and ad giant remain very bright. Its valuation is now more attractive after its 26% decline year-to date.

Amazon (AMZN): After declining 36% year-to-date, its valuation is now more appealing. Berkshire Hathaway has a $1.7 billion stake.

Apple (AAPL): Warren Buffett (Berkshire Hathaway) has recently been adding to its $150 billion stake, representing its largest holding and equaling over 40% of Berkshire’s equity portfolio. AAPL has a large ongoing stock buyback program and is earning a very high rate of return on its invested capital.

Bank of America (BAC): This very well managed bank is the second largest holding in Berkshire Hathaway’s equity portfolio. With a price/earnings ratio of 9 after a decline of 28% year-to-date, its valuation is appealing.

Berkshire Hathaway (BRK.B, BRK.A): This extremely well managed conglomerate by Warren Buffett has substantially outperformed the market over its 56-year history, with a compounded annual return of 20% per year as compared to 10% for the S&P 500 (with dividends included). Warren Buffett has recently been buying back its shares, indicating that he views these shares as being undervalued.

Meta Platforms (META): After a 51% decline in 2022 year-to-date, META’s current valuation is very attractive. It is a cash flow machine which dominates the social network space.

Microsoft (MSFT): After a 26% decline year-to-date, Microsoft is now more attractively priced as it continues to grow rapidly in its cloud applications.

Teck Resources (TECK): Even after rising 26.5% year-to-date, shares of the Vancouver-based miner of coal, copper, and zinc are reasonably valued and flying a bit under the radar. As the economy shifts from combustion engines to EVs, copper will be the new oil in the years ahead.