Dallenbach launched his professional career in the SCCA Trans-Am Series, immediately winning the Rookie of the Year title in 1984. The following year, driving for Jack Roush in a Mercury Capri, he captured the Trans-Am championship at the age of 22, becoming the youngest champion in the series at that time. He repeated as champion in 1986 with the Protofab team in Camaros, and his back-to-back titles earned him an invitation to the International Race of Champions in 1987. During this period he also accumulated an outstanding sports car record, winning the 24 Hours of Daytona four times and the 12 Hours of Sebring three times. He finished as runner-up in the IMSA GT championship in both 1988 and 1989 driving for Jack Roush in the GTO class.
Following in his father's footsteps, Dallenbach made early forays into open-wheel racing. He participated in the inaugural round of the American Racing Series in 1986, competed on four more occasions over the following two seasons, and posted a third-place result at Phoenix in 1988. He made his CART Indy Car debut at Road America as a substitute for car owner Dick Simon, who had been injured in a fall. He returned to CART in 1990 for three road course races at the season's end with the Leader Cards team, notching an eleventh-place finish at Denver before mechanical failures at Mid-Ohio and Laguna Seca ended his remaining starts.
Dallenbach transitioned to the Winston Cup Series in 1991, making eleven starts in Junie Donlavey's Fords. Former Trans-Am boss Jack Roush brought him on as a teammate to Mark Martin in the No. 16 Ford for the 1992 and 1993 seasons. His road course strength was evident, with a second-place finish at Watkins Glen in 1993, fifth at the 1991 Watkins Glen race, and tenth at the 1993 Daytona 500.
In 1994, Richard Petty chose Dallenbach to pilot the storied No. 43 Pontiac, making him only the second driver other than Petty to race the number. He posted a fourth at Sonoma and eighth at Talladega before being released mid-season. In 1995, driving the No. 22 Bill Davis Pontiac for a single appearance at Watkins Glen, he came within reach of his first Cup win before falling to second in the closing laps.
His road course reputation kept him in demand through the rest of the decade. In 1996 he raced for Bud Moore Engineering, finishing sixth at the Daytona 500, third at Sonoma, and tenth at Watkins Glen. From 1997 into 1998 he drove for Felix Sabates before stepping in as a substitute for Ricky Craven in the No. 50 Hendrick Motorsports Chevrolet, earning three top-tens. This led to a full-time assignment in the No. 25 Chevrolet for Hendrick in 1999, producing his best championship result of eighteenth with six top-tens. A season with Galaxy Motorsports in 2000 yielded a best of ninth at Watkins Glen; lack of sponsorship then ended his full-time Cup career before the 2001 season.
Without a full-time ride, Dallenbach moved into television commentary in 2001, joining NBC and TNT alongside Allen Bestwick and Benny Parsons for NASCAR coverage. He became known for his "Wally's World" segment in which he drove celebrities around race tracks before events. When the NBC-TNT partnership dissolved after 2006, Dallenbach continued with TNT's new six-race package and also covered IndyCar for NBC Sports Network from 2010 until 2014 alongside Leigh Diffey and Jon Beekhuis. He joined Fox NASCAR's Race Hub in 2015. In September 2014 he announced the broadcasting phase of his career was over and he intended to return to racing. He returned to Trans-Am competition in 2021 in the TAH subcategory with the Ultimate Headers Racing Team.
In 2006, Dallenbach won the open-wheel division at the Pikes Peak International Hill Climb, with his brother Paul finishing second. He was inducted into the Pikes Peak Hill Climb Museum Hall of Fame in 2022 and into the Trans-Am Series Hall of Fame in 2025.