By Caroline Valetkevitch

(Reuters) -Investors were awaiting a critical vote in the U.S. House of Representatives over the $31.4 trillion debt ceiling late on Wednesday, which could further ease concerns of a destabilizing default that have hung over markets for most of 2023.

Any stock market rally on passage of the deal would likely be short-lived, with the S&P 500 already near its highest levels since August 2022, said Alan B. Lancz & Associates Inc., an investment advisory firm.

"I wouldn't be surprised if there was a reflex rally if things go through smoothly," he said. "But that would be short term in duration, just because we're at the higher end of our range already."

Others believed a resolution would give markets a boost.

If the deal passes, “it would take this issue off the table for the next couple of years and could be a tailwind for markets in June,” wrote Brad McMillan, chief investment officer for Commonwealth Financial Network, in a Wednesday note.

The S&P 500 closed down 0.6% on Wednesday in a decline some analysts pinned partly on remaining uncertainty over the vote. The index is up nearly 8.9% year-to-date.

Debt ceiling concerns periodically weighed on stock markets over the last week, although most investors expected an 11th-hour agreement. Worries have been more apparent in the Treasury market, where some investors had for weeks avoided maturities coinciding with a possible default.

The bipartisan deal on raising the debt limit - announced by the White House and House Republicans over the weekend needs support from both Speaker Kevin McCarthy's Republicans and President Joe Biden's Democrats to pass, as members of both parties object to significant parts of the bill.

Investors have viewed the possibility of a U.S. default as an unlikely but potentially catastrophic event for global markets. House passage would send the bill to the Senate, where debate could stretch to the weekend, just before the June 5 date when the government could start to run out of money.

Quincy Krosby, chief global strategist at LPL Financial, expects the bill to go to a vote only if lawmakers believe they have enough support to pass it.

“I think both sides are going to make sure that they can count on the vote; otherwise they'll just hold it back until they can reach the number," she said. "Investors do think it's going to pass. But until it's signed, sealed and delivered, there is always the element of what if."

McCarthy predicted that the vote, expected around 8:30 p.m. (0030 GMT), would succeed, telling reporters, "It's going to become law."

(Reporting by Caroline Valetkevitch; Writing by Ira Iosebashvili; Editing by David Gregorio)