Asset manager Dan Veru believes US stocks could go through a sustained decline before starting a “strong rally” by the end of the year. A large-scale rally in US stocks in July raised hopes of a sustained rally for equity markets. Speaking on CNBC’s “Squawk Box Europe” before the start of the US trading session on Monday, Veru attributed July’s good performance to better-than-expected earnings and “reasonable” third-quarter guidance. Veru, chief investment officer at Palisade Capital Management, said he expects the recent bear market rally to continue as more companies report. All three major US benchmarks 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 rose about 2.5%. The broad-based S & P 500 hit its highest level since June. ‘Strong’ year-end rally Veru believes the stock market remains macro-based and could still see more volatility before the end of the year. “As the fall approaches, I believe stocks could be vulnerable to another round of selling. A downturn is usually a period of equity weakness, but I worry that the full force of higher interest rates and quantitative tightening by the Federal Reserve could create a new round of selling,” Veru said. I noted that the full impact of inflationary pressures and a series of rate hikes this year will be felt this quarter, which will translate into “more uncertainty” for third-quarter earnings. “Also, the upcoming midterm elections in the US, high energy prices and supply chain issues could create enough uncertainty to weaken stocks. I’m not sure that US stocks will make new lows, but much of the recent gains could be lost. From November 2 before [congressional] “Elections,” he added. Still, Veru predicts a “strong year-end rally” for stocks after the fall sell-off. “The Federal Reserve is likely to raise interest rates and inflation from supply chain issues. Commodity prices should begin to fall. A new bull market should begin by the end of the year to take us into 2023 and beyond,” he said. Sectors to own How should investors position themselves in this fund? Veru believes it is “time” to add energy stocks given the recent downturn. Energy is the best-performing sector in the S&P 500 this year, with gains of more than 40% year-over-year, according to FactSet data. Read more Wall Street experts say these small sizes are good. buys as recession looms — BofA gives one 40% rise These stocks are poised to bounce back if inflation peaks, Jefferies says Has the market hit a bottom? Here’s what Wall Street has to say after US stocks rebounded in July. Over the past month – consumer discretionary, technology and industrials have underperformed – amid falling crude oil prices and growing recession fears. With the US dollar “probably peaking” in the near term, Veru says that bodes well for industrials and commodity stocks. In particular, I believe that the forecast for the industrial sector is “pretty good”, and the valuations also look more attractive. It is also a fan of the health sector, given its “defensive properties”. The sector is down 6.3% this year, outperforming the S&P 500, which has lost about 14% of its market cap this year. Palisade Capital Management manages more than $5 billion in assets at the end of 2021.