The stock market surged Thursday, taking bank stocks with it, after news of weaker-than-expected spring retail sales quieted concerns about higher interest rates.

The Standard & Poor's bank index was up 1.5%, while the broad-market S&P 500 gained 1.6%. The blue-chip Dow Jones industrial average, which hit another record, closed up 135 points at 7,711.47.

In recent days investors had cooled to the bank sector, anticipating a possible hike in interest rates when the Federal Reserve's policymakers next meet, on July 1-2.

"The continuation of benign economic data suggests the Fed is less likely to raise rates in July," asserted Frank J. Barkocy, banking industry analyst at Josephthal Lyon & Ross Inc., New York.

Helped by falling rates in the bond market, banks across the board advanced. Even monoline card issuers, lethargic in the past several months, showed new life. BankAmerica Corp. closed up $2.625 at $129.625 and Chase Manhattan Corp. closed up $1.375 to $100.75.

Other significant gainers included National City Corp., up $1.625 to $55.625 and BankBoston Corp., which hit $76.875, up $1.50.

J.P. Morgan & Co., however, was downgraded by several brokerage firms on news of lower earnings estimates for the second quarter due to reduced trading revenue. Even so, damage was minimal. The stock slipped 75 cents to $109.

With the market continuing its meteoric rise, "the danger for the economy in '97 is that growth will be too stong and the economy will overheat," cautioned Bruce Steinberg, chief economist at Merrill Lynch & Co.

The message to investors from the retail sales data was, "Hey, not to worry," he said. The report indicated a sharp slowdown in consumer spending for the past three months, as March and April numbers were revised downward.

May retail sales were off 0.1%, and April sales slipped 0.9%, instead of the previously reported 0.3% decline. In March, sales were down 0.3% rather than flat, as first was reported.

"That means for the second quarter real consumer spending is growing at 1.5%, a sharp slowdown from the first quarter," said Mr. Steinberg.

"Economic activity moderating is good news for the financial markets."

"We think that the interest rate concern, as it relates to bank stocks, has been overstated," said Michael L. Mayo, bank analyst for CS First Boston.

Taking a one-year outlook, Mr. Mayo said, "Banks will outperform the market, but they will be whipsawed back and forth."

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