When you use a custom model with a semi-transparent texture on an item that doesn't have them by default (such as a diamond pickaxe), water is not rendered behind that texture.

If instead an item is used that does have it by default (such as stained glass), it does render.

Fabulous graphics settings are being used.

Screenshots:

• Left armor stand:

  /summon minecraft:armor_stand ~ ~ ~ {Tags:["me"],ArmorItems:[{},{},{},{id:"brown_stained_glass_pane",Count:1b}]}

• Right armor stand:

  /summon minecraft:armor_stand ~ ~ ~ {Tags:["me"],ArmorItems:[{},{},{},{id:"diamond_pickaxe",Count:1b}]}

• Rightmost model: dropped diamond pickaxe

Side note: there's also weird rendering with the leftmost armor stand behind the texture, but that's a different bug.