Asset manager Dan Veru believes US stocks could suffer a sustained slide before embarking on a “powerful rally” later in the year. A broad rally in US stocks in July had raised hopes for a sustained recovery in equity markets. Speaking on CNBC “Squawk Box Europe” before the start of Monday’s US trading session, Veru attributed July’s outperformance to better-than-expected earnings and “acceptable” guidance for the third quarter. Veru, who is chief investment officer at Palisade Capital Management, said he expected the recent bear market rally to continue as more companies report. All three major US 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%. ‘Powerful’ end-of-year rally Veru believes the stock market remains macro-driven and could still see more volatility before the end of the year. “As the dip approaches, I think equities could be vulnerable to another round of selling. The dip is typically a period of weakness for equities, but I’m concerned that the full force of higher interest rates and the Fed’s quantitative tightening could create a new round of selling,” Veru said. He noted that the full impact of inflationary pressures and this year’s series of interest rate hikes will be felt this quarter, translating into “greater uncertainty” for third-quarter earnings. “Also, the upcoming US midterm elections, high energy prices and supply chain issues could create enough uncertainty to weaken stocks. I’m not sure US stocks will reach a new low, but much of the recent gains could be lost before November 2 [congressional] choice,” he added. Still, Veru predicts a “powerful year-end rally” for stocks after the fall sell-off. Commodity prices should start to decline. By the end of the year, a new bull market should start to take us to 2023 and beyond,” he said. Sectors to own How should investors position themselves in this context? Veru thinks “it’s time” to add energy stocks, given the recent pullback in Energy is the best-performing sector in the S&P 500 by far this year, having gained more than 40% year-to-date, according to data from FactSet.Read More Wall Street pros say these small-caps are good buys as recession looms: BofA gives 40% upside These stocks are poised for a rally if inflation peaks, says Jefferies Has the market bottomed? With the US dollar “probably topping out” in the short term, Veru says this bodes well for industrial and commodity stocks. The outlook for the industrial sector is “pretty good”, while valuations also look more attractive. He is also fond of the health sector for its “defensive characteristics”. The sector is down 6.3% this year, outperforming the S&P 500, which has lost almost 14% of its market capitalization this year. Palisade Capital Management manages more than $5 billion in assets at the end of 2021.