I consider "water" in Jn 3:5 to be a metaphor for the Spirit's agency in regeneration.
1. Ironically, the Catholic interpretation contradicts Catholic theology. If Jn 3:5 refers to water baptism, then the rite of baptism is a sine qua non of salvation. Yet at least since Trent (i.e. "baptism of desire"), Catholic theology denies that you must be baptized to be saved. Indeed, modern Catholic theology leaves the door open for the salvation of non-Christians or even atheists.
The problem here is that the traditional Catholic interpretation predates reversals in Catholic theology that contravene the traditional interpretation.
2. As many scholars note, John's Gospel deemphasizes the sacraments.
3. The Catholic interpretation is anachronistic. Jesus upbraids Nicodemus for failing to understand something which he ought to be able to grasp. If, however, Jesus is alluding to the Christian rite of baptism, that's not something Nicodemus could be expected to know.
For some interpreters that's not a problem because they think the speeches and dialogues in John's Gospel are fictitious. They favor the baptismal interpretation of Jn 3:5 because they think the narrator fabricated a backstory to retroactively validate a later Christian rite.
So the baptismal interpretation sacrifices the historicity of the account. The same problem afflicts the eucharistic interpretation of Jn 6.
4. A recurring motif in John's Gospel is the spectacle of listeners who misunderstand Jesus because they mistake his figurative usage for literal usage. That should warn us against assuming that Jn 3:5 is literal.
5. John's Gospel makes abundant use of theological metaphors, viz. light/darkness, sheep/shepherd/sheepgate/wolf, wheat, vine, sleep, birth, bridegroom, lamb, thief.
It would therefore be surprising if Jesus is speaking literally in Jn 3:5. In that event we'd expect a broad clue that he's speaking literally rather than figuratively.
6. That's especially the case if, according to the baptismal interpretation, the rite of baptism is a prerequisite for salvation. For if no one can be saved apart from baptism, we'd expect Jesus or the narrator to dispel any ambiguity regarding such a momentous issue.
7. The OT uses aquatic metaphors. An oft-cited parallel is Ezk 36:25-27. Likewise, the "outpouring" of the Spirit (Isa 44:3; Ezk 39:29; Joel 2:28) is an aquatic metaphor linked to the Spirit.
Another possibility is that Jn 3:5 evokes the water-from-the-rock motif. That would be consistent with the way in which Exodus narratives are often a subtext in John's Gospel.
8. Furthermore, the association with OT theological metaphors would dovetail with Christ chiding Nicodemus, since he ought to be familiar with that OT background information.
9. Following Keener, I think water=Spirit is a hendiadys, in which "Spirit" is epexegetical of "water".
Moreover, that has a parallel in Jn 7:38-39, where the life-giving work of the Spirit is likened to a spring or stream.
10. That's my preferred interpretation. My fallback interpretation is "water" as amniotic fluid. For a defense of that interpretation, cf. Richard Bauckham, Gospel of Glory (Baker, 2015), chap. 5.