Asset manager Dan Veru believes U.S. stocks could go through a sustained dip, before embarking on a “powerful rally” by the end of the year. A broad-based rally in U.S stocks in July had raised hopes of a sustained rebound for equity markets. Speaking on CNBC “Squawk Box Europe” ahead of the start of Monday’s U.S. trading session, Veru attributed July’s good showing to better-than-expected earnings and “acceptable” third-quarter guidance. 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 U.S. averages closed higher on Wednesday , snapping a 2-day losing streak. The Dow Jones Industrial Average rose by 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. ‘Powerful’ year-end rally Veru believes the stock market remains macro-driven and could still see further volatility before the year’s end. “As the fall approaches, i believe that stocks could be vulnerable to a new round of selling. The fall is typically a period of equity weakness, but i am concerned that the full force of higher interest rates and quantitative tightening from the Federal Reserve could create a new round of selling,” Veru said. He noted that the full impact of inflationary pressures and the series of interest rate hikes this year will be felt this quarter, which will translate to “greater uncertainty” for third-quarter earnings. “Also, the upcoming U.S. mid-term elections, high energy prices, and supply chain issues could create enough uncertainty to make stocks weaken. I am not sure that U.S. stocks will make a new low, but much of the recent gains could be lost before the Nov. 2 [congressional] election,” he added. Still, Veru is predicting a “powerful year-end rally” for stocks after the fall sell-off. “The Federal Reserve is likely going to be done raising interest rates and inflation from supply chain issues along with higher commodity prices should begin to decline. By year-end, a new bull market should begin taking us well into 2023 and beyond,” he said. Sectors to own How should investors position against this backdrop? Veru believes “it’s time” to add energy stocks, given the recent pullback in the sector. Energy is the best performing sector on the S & P 500 by a long mile this year, having gained more than 40% year-to-date, according to FactSet data. Read more Wall Street pros say these small caps are good buys as recession looms — BofA gives one 40% upside These stocks are poised for a comeback if inflation peaks, Jefferies says Has the market hit bottom? Here’s what Wall Street has to say after U.S. stocks rebound in July But the sector returned just 5.6% over the past month — underperforming consumer discretionary, tech and industrials — amid tumbling crude oil prices and rising recession fears. With the U.S. dollar having “likely peaked” in the near term, Veru says this bodes well for industrial and commodity stocks. In particular, he believes the outlook for the industrial sector is “quite good” while valuations are also looking more attractive. He is also a fan of the health care sector given its “defensive characteristics.” The sector is down 6.3% this year, outperforming the S & P 500, which has shed nearly 14% of its market cap this year. Palisade Capital Management manages more than $5 billon in assets as at end of 2021.