"The stock market can continue to advance. What's propelling the stock market is fixed income markets that have reached their limit and low interest rates," said Steve Massocca of Wedbush Securities. "Despite the top line not looking all that good, these earnings reports, all these companies are beating on the bottom line so corporate profitability is is still pretty good. Interest rates are still basically zero and I think the stock market won't care unless the economy gets really bad."
Massocca said tepid data could actually be a plus for stocks since it will encourage the Fed to continue easing.
Some economists dismissed the GDP report as a once-off and expect to see it revised higher. "Nothing's changed. I think the economy is still growing at 2 to 2.5 percent," said Mark Zandi, chief economist at Moody's Economy.com. "I think a lot of things conspired in the fourth quarter," he said.
(Read More: Cramer Says GDP Decline Is a 'One-Off Number)
The surprise hit to GDP came from two volatile components. One was inventory accumulation and government defense spending. Barclays said these two elements subtracted 2.6 percent from overall growth. Economists had expected sluggish growth of 1 percent for the fourth quarter.
"The sharp drop in government defense outlays, -22.2 percent at an annual rate, may also reflect payback for strong growth in Q3 as well as a trimming of expenditures ahead of the scheduled sequester cut to the defense budget (originally slated for January)," Barclays economists wrote in a note. "The extent of further declines will depend on the outcome of the sequester debate but such sharp retrenchment is unlikely in our view."
Zandi said the inventory decline should auger well for future economic activity, as companies rebuild them. One hit to inventories was the decline in farm output, hit by the drought, he said.
Super storm Sandy also had some impact, hitting the northeast in late October, but that number was not quantified.
Zandi also said the pullback of military from Iraq and Afghanistan may be one factor affecting reduced defense outlays. He also attributed the defense drop to the possibility that cuts were being made ahead of the sequester, now expected to begin March 1.
The sequester is the automatic cuts to the budget that would take place, half of which hit defense spending, if Congress does not devise anew budget plan by then. The sequester was agreed as a compromise after the debt ceiling debate, and was intended to act as a stick forcing congressional action.
But Zandi said even if the sequester takes place, it will be a $65 billion hit to the economy, which will easily be able to weather it. Increasingly, traders have been speculating that Congress may be unable to agree on a solution for the sequester. "If they do that, we solve our fiscal crisis," for a while, he said.
But the sequester would hit on top of a 2 percent increase in payroll taxes that went into effect for all taxpayers this year, and the impact of that has yet to be felt. Some economists expect the tax increase to dent first quarter growth by as much as 1 percent.
There was also no sign of "fiscal cliff" impact in the numbers,a big focus of concern in the markets during the fourth quarter. "Business investment was up 8 percent and consumer spending was up over 2 percent. There's no discernible affect from fiscal cliff. This will be revised in a very big way," Zandi said, adding that final trade numbers haven't been factored in.
