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Summary: The fate of tropical forests under climate change is unclear as a result, in part, of the uncertainty in projected changes in precipitation and in the ability of vegetation models to capture the effects of drought‐induced mortality on aboveground biomass (AGB). We evaluated the ability of a terrestrial biosphere model with demography and hydrodynamics (Ecosystem Demography, ED2‐hydro) to simulate AGB and mortality of four tropical tree plant functional types (PFTs) that operate along light‐ and water‐use axes. Model predictions were compared with observations of canopy trees at Barro Colorado Island (BCI), Panama. We then assessed the implications of eight hypothetical precipitation scenarios, including increased annual precipitation, reduced inter‐annual variation, El Niño‐related droughts and drier wet or dry seasons, on AGB and functional diversity of the model forest. When forced with observed meteorology, ED2‐hydro predictions capture multiple BCI benchmarks. ED2‐hydro predicts that AGB will be sustained under lower rainfall via shifts in the functional composition of the forest, except under the drier dry‐season scenario. These results support the hypothesis that inter‐annual variation in mean and seasonal precipitation promotes the coexistence of functionally diverse PFTs because of the relative differences in mortality rates. If the hydroclimate becomes chronically drier or wetter, functional evenness related to drought tolerance may decline. [ABSTRACT FROM AUTHOR]