Bank shares trounced the overall stock market last week, as investors continued to pump new life into the sector.

Even with a sluggish performance Friday, the American Banker index of bank stocks floated up 2.8% in the past five trading days, while the Dow Jones industrial average lost 0.1%

Leading the way up were shares of Society Corp., which jumped 8.8% to close Friday a $33.75.

Mellon Bank Corp. shares jumped 6.9% to $57.75. Other big gainers included Bank of Boston, up 5.9% to close at $24.375; and Citicorp, up 5.3% to $29.375.

Investors, at least temporarily, have shrugged off the fears of inflation that caused bank stocks to plunge in April and May.

|Favorable Prospects'

Now, money managers said, investors are zeroed in on what are expected to be outstanding second-quarter earnings.

"Bank stocks are coming back because of favorable prospects for earnings and their good financial condition," said Harlan Sonderling, an analyst with Putnam Cos. in Boston.

"I think that second-quarter earnings will show remarkably robust net interest margins, incipient signs of loan growth, progress in expense control, and high levels of capital," he added.

Miles P.H. Seifert, chairman of Gray, Seifert & Co. Inc., New York-based money managers, agreed with that outlook. "Get ready for a blowout," he said

Mr. Seifert said portfolio managers are looking for companies capable of solid earnings growth. But for the past two weeks they've heard nothing but bad news from Kmart, Nike Reebok, and other companies which have told analysts that second-quarter earnings will be lackluster.

Some Skittishness Evident

The banking sector also got boosts last week from some bank analysts, who reiterated "buys" or raised earnings estimates for Citicorp, Wells Fargo & Co., and other banks.

Wall Street, though, wasn't unanimous on bank shares. Prudential Securities downgraded eight banks and reduced the industry's rating to a |hold."

The selloff in bank stocks this spring, which lopped 15% off bank shares, underscored investors' skittishness.

No one is ruling out another setback for bank stocks after second-quarter earnings are released. But if a selloff occurs, money managers said it will be short-lived -- a case of profit-taking and selling into the strength of a rising market.

Money managers said last week's rally, which followed a prolonged selloff this spring, was sparked by a change in investor attitudes about interest rates.

Inflation scares caused many observers to predict the Federal Reserve would jack up short-term rates to fight rising prices. Those higher rates, some money managers feared, would generate a higher cost of funds for banks and erode profits.

But the economic news released last week indicated that the economy was still weak, dampening inflation fears.

Last week's rally left some money managers shaking their head at the fickleness of the market. They said that bank's net-interest margins would not narrow if short-term rates rise 25, 50, or even 75 basis points.

Banks, the money managers argue, mostly fund themselves through deposits. And banks are not likely to hike rates unless loan demand rises.

"The economy isn't moving real fast," said Harry Strunk, an investment consultant in Palm Beach, Fla. "Even if rates go up, banks won't get hit overnight."

Alison Deans, an analyst with Smith Barney, Harris Upham & Co., noted that signs of a pickup in lending are helping some stocks. In particular, she attributed a recent rebound in First Interstate Bancorp's shares to loan growth at the Los Angeles-based company.

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