The film opens with Ponyboy Curtis (C. Thomas Howell) sitting at his desk in his room, writing. He talks about walking home from the movies one night. As he is bouncing and messing with a ball, he recites parts of the movie that he's just seen when a group of guys pull up in a red Corvair. They start to call him a greaser because he has greasy hair, and he tries to evade them. They're the Socials, clean-cut teens dressed in Varsity letter jackets and chinos, also known as the rich kids or the South Side Socs. The Socs stop, get out, and attack Pony, knocking him to the ground as he struggles. The soc on top of Pony puts his knees on Pony's elbows, asking, "How would you like that haircut to begin just below the neck?" Ponyboy struggles but is unable to unpin himself. As the socs try and shut him up, the knife accidentally slips and cuts his head slightly. Hearing his screams, Pony's older brothers, Darrel (Patrick Swayze) and Sodapop (Rob Lowe) and the rest of their gang, Johnny Cade (Ralph Macchio), Dallas Winston (Matt Dillion), Steve Randall (Tom Cruise), and Two-Bit Matthews (Emilio Estevez) come to his rescue, chasing off the Socs. Darrel, Sodapop, and Ponyboy lost their parents in a car crash. Darrel, a high school grad with a job, acts as the father figure. Soda is a dropout who works at a gas station. The three are allowed to live together without parental supervision as long as they stay out of trouble. Pony is still in high school at Darry's insistence.
Dallas, Johnny, and Ponyboy go to a drive-in movie and sit in the bleachers. Cherry (Diane Lane) quarrels with her Soc date and leaves his car, going to sit in front of the greasers with her friend . Dallas tries to chat her up but Cherry seems to connect more with Ponyboy and Johnny. Dallas finally says something offensive and Cherry, unafraid of his tough-guy attitude, tells him to shut his mouth. When Dallas reaches for her, Johnny stops him, being the only member of the group able to do so. Spurned, Dallas stalks off. Pony goes with Cherry to the concession stand. While waiting in line, they talk about their respective friends. Pony's view is that he and his friends are persecuted by the Socs because they're poor, dress differently and are often considered delinquents. Cherry counters, saying that her group has their own problems, ones that the greasers couldn't even imagine. Back at their seats, Two-Bit joins the group and after the movie ends, the three boys and two girls walk together chatting. Cherry's boyfriend, Bob, stops in his car nearby. He's drunk and harshly admonishes her for hanging out with the greasers. To avoid a fight, Cherry reluctantly goes with him.
When he arrives home, Ponyboy is harshly reprimanded by Darry for staying out so late. When his brother tries to stop the argument, Darry pushes Pony a bit too hard, spilling him to the floor. Pony runs out of the house despite Darry's attempts to apologize and he finds Johnny sleeping in a vacant lot.
Not long after, the Socs ambush Ponyboy and Johnny at a park with a fountain. The Socs dunk Ponyboy's head in the water, nearly drowning him. Johnny pulls out a switchblade to stop them. Bob is left dead and everyone flees. Johnny, unusually calm only a few minutes after he kills Bob, decides that he and Pony should find Dallas. They go to a house where Dallas had been partying with an old friend and talk to him about hiding out. Dallas gives them instructions to board a train to a small village where they can hide out in an abandoned church. Johnny and Ponyboy hop a freight train and make their way, break into the church, and fall asleep. The next morning Johnny comes back with food, cigarettes, peroxide, and a paperback copy of "Gone With the Wind". The two hide out in the church for several days, waiting for word from Dallas. They cut their hair with pocket knives and Ponyboy dyes his blond in an attempt to disguise themselves. The two spend several days playing cards, Pony reads "Gone With the Wind" to Johnny, and they try to trap a rabbit. One morning, Pony wakes up early and sees the valley below the church in the sunrise, admiring its beauty. He recites a Robert Frost poem, "Nothing Gold Can Stay" that Johnny takes to heart.
A few days later Dallas arrives and takes them out to eat. He tells Ponyboy about how the police are looking for Bob's killer, even hauling Dallas himself in for questioning. Soda and Darry are both worried about Pony's disappearance but Dallas has assured them that the two are safe.
Johnny wants to turn himself in as it sounds like they can claim self-defense, but Dallas tries to discourage him, warning him of what can happen if Johnny gets jail time. On returning to the church, they find it burning and a group of young kids milling about with two adults and a school bus. The woman exclaims some kids are trapped inside. Johnny and Ponyboy enter to rescue the kids, Dallas reluctantly following. They find the kids in a back room and carry them to safety, Dallas helping out. Suddenly the roof collapses and Johnny is badly burnt and his back is broken. Dallas pulls both of them to safety. EMS finally arrives and takes them back to their hometown and the hospital. The boys are all hailed as heroes, and Ponyboy is reunited with Darrel and Sodapop.
The Socs and Greasers plan a big rumble to settle things after the death of Bob, and Cherry acts as the go-between: No knives or other weapons; fighting will only be hand-to-hand. Two-Bit and Pony go to the hospital to visit Dallas and Johnny. Johnny is suffering from horrible burns and is in traction, seemingly paralyzed. The visit is very emotional and Johnny becomes very upset when a nurse tells him that his mother has come to visit. He doesn't want to see her, as he feels she doesn't care about him. He orders the nurse to send her away, and faints. Pony and Two-Bit leave, shaken by the encounter. When they visit Dallas, he is arguing with a nurse. Dallas asks about Johnny and they tell him the outcome doesn't look promising. Dallas is desperate to join the big rumble and asks Two-Bit for his knife, talking about revenge for Johnny's sake.
On the night of the rumble, despite signs of exhaustion, Ponyboy wants to go. Darrell reluctantly lets him participate, telling him and Soda to run away if cops arrive. The Socs arrive and the big rumble gets underway as the groups pair off and start slugging. Both sides get their licks in but after a while the Socs retreat, the Greasers whooping with delight at their victory. Just before the first punch is thrown, Dallas arrives, having left the hospital. When the fight ends, Dallas grabs Pony and they drive to the hospital to see Johnny, who is weaker than ever. On the way, Dallas tells Pony to stay tough and nothing will ever faze him. When they arrive, Dallas tells Johnny that the Socs have been driven out of their territory for good. Johnny seems not to care and tells Pony to "stay gold". Johnny dies and Dallas becomes incredibly upset, dry-firing a pistol at a doctor and babbling madly. Pony heads home to find Darrell and the rest of the gang nursing their wounds. He tells them that Johnny died and Dallas tore off in a fury. While Pony worries that Dallas will do something crazy, Dallas holds up a convenience store and is shot and wounded. He calls Pony's house, asking for a place to hide from the police. The cops chase him and shoot him when he waves the unloaded gun at them. The police open fire and his friends arrive just as he dies; his last word is "Pony". Pony faints from exhaustion.
At the trial Cherry gives her testimony and Ponyboy is declared not guilty. Back at school Ponyboy is now neatly dressed and coiffed; Cherry ignores him and a teacher gives him an extension to finish his writing assignment.
At home Darrel rides Ponyboy as Sodapop runs off into the night. The three brothers reunite and Sodapop tells Darrel to stop being so hard on Ponyboy, the three only have each other and they all need to get along. They have a group hug and return home.
At home at his desk, Ponyboy sits down and begins to write his story, starting with the moment he left the movie theater: "When I stepped out into the bright sunlight from the darkness of the movie house, I only had two things on my mind: Paul Newman, and a ride home", the first line from the novel.