(FORTUNE Magazine) – Call it a mid-season slump. After starting the year red-hot, stocks cooled off during the second quarter and headed into the summer almost exactly where they closed in late March -- lots of churning, but no progress. Fortune's quarterly < investment guide sees more of the same in the months just ahead: With corporate profits yet to rebound and interest rates poised to move up, stocks probably won't score big gains. More likely the market will continue to be rocked by Japanese stock scandals, renewed inflation fears, and the return of those familiar double-dip recession theories. Yet despite the bumpy ride, now is not the time for wholesale selling -- nor is it time for a buying binge. Rather, investors should search for stocks that will produce solid gains as the economic recovery unfolds, as it soon will. Many of these stocks are already looking a tad expensive, but as earnings gains begin to roll in, their P/Es will shrink and their prices should rise. Choose carefully. The stock market has gotten a bit ahead of itself lately, and stocks are extremely vulnerable to disappointment. According to valuation studies done by Goldman Sachs, equities are 5% overvalued. The price/earnings multiple for the S&P 500-stock index checks in around 18, far above the long- term average of 13 and uncomfortably close to the average P/E of about 20 that prevails at stock market peaks. Most other valuation indicators are equally off-putting: Industrial stocks sell for 2.9 times book value, far above their historical average multiple of 1.7, and at 3.2% the dividend yield on the S&P 500 is dangerously low. If all that makes you feel queasy, join the club. ''The way I see it,'' says Robert Stansky, portfolio manager of the $1.1 billion Fidelity Growth Company Fund, ''this is a textbook case of how it feels at the end of a recession.'' But Stansky, whose fund is up over 20% this year, thinks relief is on the way. Second-quarter earnings, he says, will continue to come in weak, but he looks for substantial gains by year-end. FORTUNE's economists agree, calling for real GNP growth at a 3.3% annual rate in the second half of the year, below the strength of past recoveries but enough to give newly lean corporate titans some handsome profit increases. They'll need it. Our forecast also calls for short-term interest rates to soon begin trending higher, providing stiff competition for stocks. If earnings improvements do appear, the Dow should be able to resume climbing, though at a slow pace. Investors who want snazzy returns will need to own the right stocks. So which are the stocks to buy now? Elaine Garzarelli, quantitative strategist for Shearson Lehman Brothers, correctly predicted that stock groups & like building materials and leisure time companies would lead the market for the first half of the year. Many of these stocks are up twice as much as the S&P 500. Now Garzarelli sees some new stocks moving to the fore. One she likes is Cyprus Minerals, which gets over half its sales from copper and should eventually enjoy a recovery-driven rebound in copper prices. Among her other favorites are oil services giant Halliburton and Westinghouse Electric, both down more than 25% from their highs. Says Garzarelli: ''These stocks do well after the economy bottoms, and they are at bargain prices.'' Bank The shares of banking companies are up 30% so far this year, but by most lights they are still among the cheapest around. Some deserve to be. ''All bank stocks are not created equal,'' says bargain hunter Michael Price, portfolio manager of the $2.5 billion Mutual Shares Fund in Short Hills, New Jersey. He looks for the exceptional banks that have good balance sheets and reliable earnings growth. Price favors First Chicago and Mellon Bank. ''Both sell at a discount to book value and have stable, large nonbanking businesses such as credit cards and computer services,'' he says. The two banks also have adequate reserves to cover any future loan problems. To hedge your bets in the transition from recession to growth, Abby Joseph Cohen of Goldman Sachs believes now is the time to balance a portfolio of recovery plays with some traditional blue-chip growth stocks. ''Our favorites on the growth side are stocks like Bristol-Myers Squibb, a leading spender on R&D among drug companies and attractively priced. I also like Nestle, whose earnings will benefit from the rise in the dollar. It sells for a 40% discount to other food stocks.'' As for her plays on the economic recovery, Cohen reasons that many of the obvious bets, like the shares of such commodity companies as paper and chemical makers, already reflect optimistic earnings expectations. Says she: ''I would steer clear of them and look instead at transportation stocks like AMR, which will thrive in the continued shakeout in the airline business. I also like Union Pacific and Federal Express, which sell at substantial discounts to the market and are well positioned to benefit from a recovery in commercial traffic.'' Come October these stocks could be home-run hitters. -- BONDS. With 30-year Treasury bonds yielding 8.44% and three-month Treasury bills at 5.75%, the gap between long- and short-term yields is as wide as it has been in three years. Is it time to take the plunge and lock in those high long-term yields? Not yet. The rates on long bonds could go still higher as an avalanche of new issues hits the market during the next few months. Notes Fabio Savoldelli, senior fixed-income manager at Swiss Bank Corp.: ''The auctions we've seen, and will continue to see, are some of the biggest the Treasury has ever had. Seven billion dollars a week is an awful lot of bonds for people to swallow.'' If you're looking for Treasuries, hold off until after the big refundings cool down, possibly later this year. Elsewhere in the bond market, there is growing excitement about corporate securities, which returned a respectable 6% in the first half of this year, compared with 3.4% for intermediate-term Treasuries. Bill Westhoff, head of fixed-income management for IDS Financial Services, favors selecting the bonds of corporations whose business will improve with the economic upturn, like the noncallable 9.875% bonds of the mining company AMAX, due June 2001 and currently yielding 9.91%. Further down the quality scale in corporate bonds, high-yield junk issues are back in favor. Small wonder. Since January junk bonds have returned 20.5%. Thanks to a milder recession than most people expected and easier access to the equity markets for debt-heavy companies, many junk bond issuers are enjoying credit-quality upgrades from Moody's and Standard & Poor's. Before you load up on junk, take heed of the risks. Says Joseph Bencivenga, head of high-yield research at Salomon Brothers: ''We are looking for double- digit returns despite record defaults.'' Message: Don't let one bad apple spoil your returns. Diversify your junk bond investments through a well-run junk bond mutual fund, like the Plymouth High-Yield bond fund, which has returned 20.2% over the year. In the world of municipal bonds, headline-grabbing news like the recent bankruptcy filing by Bridgeport, Connecticut, is a stark reminder that credit quality remains paramount. Pamela Hunter, a portfolio manager at Chase Manhattan's private-banking group, recommends shifting out of general- obligation munis and buying essential-service revenue bonds, like those issued by the Triborough Bridge and Tunnel Authority in New York City, which are backed by tolls. Says she: ''I am uncomfortable relying on property or income taxes as the source of payment, especially as more cities and states face budget deficits.'' -- REAL ESTATE. In the current shakeout good properties are coming on the market for a song. Real estate companies that have the cash to take advantage of these bargains are cleaning up. Says Bruce Garrison of the Houston real estate securities research firm Garrison Brothers: ''We are looking for well- capitalized participants in the real estate market.'' Garrison finds some of the best plays in his backyard. One of Garrison's favorites is Mitchell Energy & Development, a financially sound oil and gas driller that also owns the Woodlands, a planned 25,000-acre community that has the largest share of new housing starts in Houston. Lot sales are accelerating, and the average price paid per lot is up 20% over the past 12 months. The stock sells for $19.50 a share, and Garrison expects it to hit $25 this year. Weingarten Realty Investors, a shopping center REIT with properties concentrated in the Houston area, has been on money managers' buy lists even during Houston's lean years. ''Given how well management did in a bad market, the appeal of Weingarten is how much better it could do in a good market,'' says John Moran, portfolio manager of the PRA Real Estate fund in San Francisco. The shares now trade at $29, with a yield of 6.5%. The stock prices of companies that invest in office buildings have recovered only slightly from a devastating slide last year (see table below). With good reason. Salomon Brothers real estate guru David Shulman estimates that it will take 14 years to absorb the extra supply of offices in central business districts. That means the tenant is king and the office investor is going broke. Don't be tempted by low prices. Says Michael Kirby, a principal at Green Street Advisors, a real estate securities research firm in Newport Beach, California: ''Offices are a black hole.'' Kirby sees healthy profits in a different sector: ''Apartments have the most solid prospects of any investment properties in real estate.'' BRE Properties, a REIT with apartments primarily in California and Washington, is among his top picks. The shares yield a rich 8.3% and could appreciate 5% to 10% by the end of the year, according to Kirby. The Housing market is showing nascent signs of life. The Northeast is slowly improving, as are the Southeast and California, according to Allen Sabbag, president of Better Homes & Gardens Real Estate Service, a nationwide broker. He notes that Florida and the Southwest will probably show the best appreciation for residential real estate over the next six months or so. An important trend for the 1990s, says Sabbag: ''The value of a home will outpace inflation, but it will not be like the Eighties. Housing will be more of a shelter than an investment.'' What ever will we talk about at cocktail parties? -- COMMODITIES. Trading profits have been a precious commodity in the futures market lately. Hammered by recession, prices for most goods have been falling. An economic recovery should help boost prices on everything from barley to bullion, but don't expect to reap a windfall. Says William B. O'Neill, senior futures strategist at Merrill Lynch: ''We'll have a recovery but not a bull market.'' The problem is high production and mediocre demand, especially among the agricultural and industrial-metals markets. One area of price strength: lumber. While the U.S. government ruminates upon the plight of the spotted owl, logging has been halted on affected land. Lumber analyst Bud Merrill of Shearson Lehman estimates that this year's production nationwide will be chopped to less than a third of last year's level. That supply cut has already sent lumber prices higher, but Merrill anticipates another $40 to $50 rise by the end of the year, from a current $231 per 1,000 board feet. Such a run would produce a profit of $6,400 to $8,000 per futures contract. Don't count on gold to make your portfolio glitter. Fortune's economists expect that inflation will perk up a bit but not enough to get gold prices stirring. Prospects are further dimmed by the growing popularity of index futures and options, which provide an efficient means of hedging investment portfolios against disaster -- a role that gold used to play. Notes J. Clarence Morrison, metals analyst at Prudential Securities: ''Gold has lost much of its storehouse of value, its hedging capability, and its role as a safe haven.'' Morrison reckons that the price will stay under $400 per ounce for the rest of the year.

BOX: FORTUNE's quarterly investment guide

WHAT THE HECK DO I DO NOW?

STOCKS Load up on shares that will benefit from an economic upturn, like Cyprus Minerals and Union Pacific.

BONDS Junk bonds are bouncing back. Among munis, go with quality revenue bonds. They're safest.

REAL ESTATE Though the market is turning up, stick to the strongest players. Apartment REITs look best.

COMMODITIES Gold will stay below $400 per ounce for the remainder of the year.

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: Many of the top-performing stock groups during the first half of 1991 were consumer-related. Now analysts expect capital equipment and transportation stocks to advance. THE BEST STOCKS THE WORST STOCKS

CHART: NOT AVAILABLE CREDIT: FORTUNE TABLE/SOURCE: COHEN & STEERS ASSET MANAGEMENT CAPTION: REAL ESTATE RETURNS After a near-fatal 1990, real estate is back. Demograph ics and a reviving economy bode well for most sectors. Only office buildings face a dark horizon.