Electrical – What’s going on with this switched outlet wiring in the middle of a run

Some general rules.

1. Black and red wires shouldn't be going to neutral terminals. Silver is neutral.
2. In general, the tabs on the neutral (silver) side shouldn't be broken unless the upper and lower portions of the socket are being fed from different circuits.
3. Cable that has black/white/ground is called 2 wire (as in 14/2; the ground is not counted), and black/white/red/ground is called 3 wire (e.g. 12/3)

It sounds as if line power is coming into outlet box 2, the black/white cable. You can confirm that by turning off the power, disconnecting the black wire and leaving it clear of the outlets and other wires, then turning on the power and carefully checking to see if it is hot. Then turn the power back off before proceeding.

I would start with new outlets with tabs intact. (They are cheap). Break off the tabs on the brass side only on each.

Box 2: Connect the black hot (from the 2 wire cable) to the black from the three wire cable and to a pigtail (a short piece of black wire) with a wire nut or a push in connector. Connect the pigtail to the lower brass terminal. Connect the red wire to the upper brass terminal. Connect the two white wires to the silver terminals (the tab on the silver side should be intact).

Box 1: Connect both black wires from the three wire cables and a black pigtail with a wire nut or connector. Attach the black pigtail to the lower brass terminal. Connect the two red wires and a red pigtail with a nut or connector. Attach the other end of the pigtail to the upper brass terminal of the outlet. Attach the two white wires to the two silver terminals. (Tab intact.)

Switch box: Leave this as is, but cap the white wire if it is not already.

In all boxes, attach all of the ground wires and attach the ground to the outlet ground screw.

The lower halves of each outlet should now be always hot and the upper halves switched.

Whenever you see neutrals pigtailed, leave it that way. The circuit might be a MWBC or "multi-wire branch circuit".**

Here, the more likely reason is they're using this box as a junction. It's a good practice, and most receptacles don't have 3 attachment points. (you can use the back wires, OR the screw terminals, not both at once.)

In fact, don't use "back stabs" at all (where you push the wire in and it grabs). The mechanism is cheap and horrible (there are 4 on a 60-cent socket, hello). They frequently fail, causing internal arcing, and they burn and melt the receptacles and the wire.

Do Not get clever and pigtail a 14 AWG wire to the receptacle. As long as all the wire in the circuit is 12 AWG, you can use a 20A breaker. If even a single inch of 14 AWG is part of the circuit, you must use a 15A breaker.

Actually you can go the other way and upgrade the receptacle to 20A. As a rule, those tend to be the higher quality receptacles in the $3-4 range.

And those better receptacles often have a feature called "screw-and-clamp". It has back-holes, but they are directly behind the side screws, and tightening the side-screw is the force that clamps the wire. These are fine. Here's a page on the difference.

(by the way, 15A receptacles are rated 20A internally by UL requirement; they are only constrained to 15A per socket).

** An MWBC is an efficient way to add a second 120V circuit with only one more wire; sharing neutral and ground. Since the neutral is shared, pigtailing is vital so changing an outlet doesn't interrupt the other circuit's neutral. New MWBC circuits must have a maintenance shut-off that disables all circuits; but "belt and suspenders" as they say.