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The movie begins with Ponyboy Curtis (C. Thomas Howell) wondering how to write the story. He then starts with the beginning of the novel, followed by the credits. After the credits, the scene shifts to Ponyboy, Dallas Winston (Matt Dillon), and Johnny Cade (Ralph Macchio) sneaking into a drive-in theater and sitting behind two "Soc"(pronounciation: shoshe) (as in social) girls, Cherry Valance (Diane Lane) and Marcia (Michelle Meyrink). Dallas starts flirting with Cherry. He refuses to leave her alone until Johnny tells him to back off. Dallas stalks off, and the girls ask Ponyboy and Johnny to sit with them. Later, the boys are walking the girls home when their drunken boyfriends, Bob Sheldon (Leif Garrett) and Randy Adderson (Darren Dalton), catch up to them in their Mustang. Bob and Randy are itching to fight with Ponyboy and Johnny, but Cherry defuses the situation by asking Bob and Randy to take Marcia and her home. Johnny and Ponyboy then go to a vacant lot and end up falling asleep.

When Ponyboy goes home, his brother, Darrel (Patrick Swayze), is upset with worry, and during the confrontation, he hits Ponyboy. Ponyboy, who has never been hit by anyone in his family, runs from the house back to the vacant lot and wakes Johnny. They go to a nearby park to cool off. At the park, Ponyboy and Johnny are confronted and harassed by Bob, Randy, and their friends. The Socs try to drown Ponyboy in a fountain, but they flee after Johnny pulls a knife, stabbing and killing Bob. Ponyboy and Johnny seek help from Dallas, who gives them a loaded gun, some money, and directions to an abandoned church in Windrixville, where they are to hide out until Dallas comes to retrieve them. Ponyboy and Johnny cut off their hair to make themselves less recognizable, and Ponyboy bleaches his hair blonde with peroxide. The boys pass the time by smoking cigarettes, playing cards, and eating boloney sandwiches. Ponyboy also reads to Johnny from a paperback copy of Gone with the Wind and shares the Robert Frost poem Nothing Gold Can Stay with him. Ponyboy confesses that he never quite understood the poem.

A week later, Dallas comes to visit the boys and takes them to get some hot food at a nearby Dairy Queen. Dallas tells Ponyboy and Johnny that Cherry is willing to stick up for them with the authorities. Johnny says that Ponyboy and he want to go home and turn themselves in, which upsets Dallas. Nevertheless, he starts the drive back home. On the way home, Ponyboy, Johnny, and Dallas pass by a church that is on fire. When they hear the cries of children trapped inside, Ponyboy and Johnny both run in to rescue them, and they get all the children out safely. Ponyboy escapes the inferno, but a beam collapses and falls on Johnny, before he can escape the burning building as well. Dallas immediately goes to rescue Johnny. Afterward, all three boys are taken to the hospital. Dallas has minor injuries to his arm, and Ponyboy is basically unhurt. Johnny, however, is in critical condition with severe burns and a broken lower back. Ponyboy's brothers, Darry and Soda (Rob Lowe), come to see Ponyboy, and as the brothers hug each other tightly, Darrel cries openly - something he hasn't done in years, not even at his parents' funeral - relieved that Ponyboy is alive.

The next day, Ponyboy is resting at home when Steve Randle (Tom Cruise) and Two-Bit Matthews (Emilio Estevez) come over. They show him a newspaper article that calls Ponyboy, Johnny, and Dallas heroes for rescuing the children in Windrixville. The article also says that Johnny is being charged with manslaughter for killing Bob Sheldon and that Ponyboy and Sodapop might be put in a boy's home. Even though Randy Anderson and the other Socs admitted that they were the aggressors, and that Ponyboy and Johnny were only defending themselves, Bob's death at Johnny's hands has sparked the call for a "rumble," a gang fight, from the Socs.

The day of the rumble, Randy seeks out Ponyboy and admits that he doesn't want to fight in the rumble, nor will he, because he feels that no matter what the outcome, nothing will ever change. Randy has grown weary of all the fighting. He tells Ponyboy that he is ready to leave town to get away from it all and just wanted to tell this to someone who would understand how he feels. Dallas breaks out of the hospital to join in the rumble. The rumble begins, and by the end, the Greasers stand victorious. As the Greasers revel in their triumph, Dallas and Ponyboy rush to the hospital. Dallas tells Johnny about the Greasers' victory, but Johnny doesn't seem interested. Dallas then tells Johnny that he is proud of him, which fills the younger boy with happiness. Johnny looks over at Ponyboy and tells him to "stay gold," and with that, Johnny dies. Completely heartbroken, Dallas flees the room.

Ponyboy returns home to tell the rest of the gang that Johnny is dead and that Dallas ran off. The gang is worried about what Dallas might do, and their worry becomes alarm when Darrel receives a phone call from Dallas, who has robbed a convenience store and is now being pursued by the police. He tells the gang to meet him at the vacant lot. The gang races to the vacant lot to intercept Dallas, but they are too late; Dallas is already surrounded by police officers. He pulls out an unloaded gun, in the hopes that he will be shot by the police. His plan succeeds in front of his horrified friends.

Days later, Ponyboy is flipping through the copy of Gone With the Wind that Johnny had left behind and finds a letter from Johnny, addressed to him. Johnny's letter explains what the phrase "staying gold" in the Frost poem means. He urges Ponyboy to tell Dallas about it. The film ends with Ponyboy writing the opening line of the film, which is also the first line of the novel: When I stepped out into the bright sunlight, from the darkness of the movie house, I had only two things on my mind: Paul Newman and a ride home...