Big bank stocks dropped another 3.52% Thursday, and analysts were puzzled about why.

"Are we in a bear market? I don't know," said Lawrence Cohn, research director at Ryan, Beck Securities. "Clearly, bank stocks are not doing well."

"Investors just don't know which way to turn," said Joseph Battipaglia, chairman of investment policy at Gruntal & Co. "Banks have carried a premium valuation on the belief that they will have good earnings," Mr. Battipaglia said. "Maybe not all companies can execute on that."

The decline in shares of big banks was part of an overall market selloff, with the Dow Jones industrial average down 2.2%. Smaller banks performed better. The Nasdaq bank index lost 0.83%, compared with the 3.52% decline in the Standard & Poor's bank stock index.

Some analysts said the market declines may reflect investor concerns that inflation is rising, threatening higher interest rates. But in fact, recent government reports indicated that inflationary pressures are declining.

Bank of America Corp. fell $3.50, to $62.50; Chase Manhattan Corp., $2.625, to $72.75; and J.P. Morgan, $3.75, to $135.125.

Regionals were equally hard hit, with BankBoston Corp. off $1.0625, to $46.9375; and PNC Bank Corp., $1.25, to $56.50.

Mr. Battipaglia said he still believed that the group had value, but that investors remained spooked by economic signals and First Union Corp.'s announcement Tuesday that, for the second time this year, earnings would fall short of expectations.

Investors received mixed signals about the economy. The government revised its estimate of economic growth in the first quarter downward, to 4.1%, as a larger trade deficit ran up against the strong pace of spending by consumers. The growth of the gross domestic product was down from the a previous estimate of 4.5% and lagged the fourth quarter's pace, which was 6%.

Economist Scott J. Brown at Raymond James Securities said the data pointed to continued strength in the economy.

"Demand for goods was still very strong," Mr. Brown said. "We expect things to slow in the coming quarter but growth remains strong."

"We're living in a very volatile world," said Phil Cuthbertson, head trader at Keefe, Bruyette & Woods.

"We had a fantastic day yesterday for no apparent reason, and now its being given back."

He said bank stocks were getting hit because of their perceived vulnerability to rate increases and also because the general market was soft.

"There is a lot of knee-jerk reaction and very little direction," said Kate Blecher, a banking analyst at Brown Brothers Harriman.

"People start talking again about rising interest rates," and the market heads lower, Ms. Blecher said.

She said she was more comfortable with the earnings from fees at banking companies such as Bank of New York, down $1.1875, to $35; and Mellon Corp., down 68.75 cents, to $34.8125.

Aside from interest rate risk, David Ellison, a manager of bank funds at Friedman, Billings & Ramsey, saw a fundamental shift.

"Things have gotten very complicated," he said of mergers that have produced megabanks in the past three years.

"No one can figure them out," prompting earnings surprises that investors are going to experience more and more, Mr. Ellison said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.