Asset manager Dan Weru believes US stocks could go through a prolonged decline before starting a “powerful rally” by the end of the year. A broad rally in US stocks in July raised hopes of a sustained recovery in equity markets. Speaking on CNBC’s “Squawk Box Europe” before the start of the U.S. trading session on Monday, Veru attributed July’s strong performance to better-than-expected earnings and “acceptable” guidance for the third quarter. Veru, who is chief investment officer at Palisade Capital Management, said he expects the recent bear market rally to continue as more companies report. All three major U.S. averages closed higher on Wednesday, snapping a 2-day losing streak. The Dow Jones Industrial Average rose more than 400 points, while the tech-heavy Nasdaq Composite jumped about 2.5%. The broad-based S&P 500 hit its highest level since June. ‘Strong’ end-of-year rally Veru believes the stock market remains macro-moving and could still see further volatility before the end of the year. “As the fall approaches, I believe the stock could be vulnerable to another round of selling.” A decline is usually a period of weakness in stocks, but I am concerned that the full force of higher interest rates and quantitative easing by the Federal Reserve could create another round of selling,” Veru said. He noted that the full impact of inflation pressures and this year’s series of rate hikes will be felt this quarter, leading to “greater uncertainty” for third-quarter earnings. “Additionally, the upcoming U.S. midterm elections, high energy prices and supply chain issues for supplies could create enough uncertainty to send stocks weaker I’m not sure US stocks will make a new low but much of the recent gains could be lost before Nov 2 [congressional] election,” he added. Still, Veru predicted a “powerful year-end rally” for stocks after the fall selloff. “The Federal Reserve is likely to end up raising interest rates and inflation from supply chain issues along with higher oil prices commodities should start falling. A new bull market should begin by the end of the year that will take us to 2023 and beyond,” he said. Sectors to own How should investors position themselves against this backdrop? Veru believes it is “time” to add energy stocks given the recent retreat Energy is the best-performing S&P 500 sector this year, having gained more than 40% since the start of the year, according to FactSet data. Read More Wall Street pros say these small caps are good buys as recession looms — BofA gives 40% rise These stocks are poised for a comeback if inflation peaks, Jefferies says Has the market bottomed out? Here’s what Wall Street had to say after U.S. stocks rebounded in July But the sector returned just 5.6% last month — underperforming consumer discretionary, technology and industrials — amid falling crude oil prices and rising fears from recession. With the US dollar “likely to have peaked” in the near term, Veru says that bodes well for industrials and commodity stocks. In particular, he believes the outlook for the industrial sector is “quite good”, while valuations also look more attractive. He is also a fan of the healthcare sector given its “defensive characteristics”. The sector is down 6.3% this year, outperforming the S&P 500, which has lost nearly 14% of its market capitalization this year. As of the end of 2021, Palisade Capital Management has over $5 billion in assets under management.