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 red ball, he is reciting parts of the movie that he had 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 are 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 beside him and get out. They attack Pony, and knock him to the ground as he struggles. The soc on top of Pony, puts his knees on Pony's elbows, saying, "How would you like that haircut to begin just below the neck?" Ponyboy struggles but is unable to unpin himself. As they Socs try and shut him up, the knife accidentally slips and cuts his head slightly. Soon Pony's 2 older brothers, Darrel Curtis (Patrick Swayze), Sodapop Curtis (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, hearing his screams. The boys chase off the Socs. Darrel, Sodapop and Ponyboy are three brothers who have lost their parents in a car crash. Darrel is a high school grad and has a job, he acts as the father figure. Steve has dropped out of school and works at a local 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 the insistence of Darrel, who is often overbearing.
Dallas, Johnny and Ponyboy go to a drive-in movie and sit in the bleachers. Cherry (Diane Lane) has an argument with her Soc date and leaves his car, she sits 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 dream of. 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, in the blue mustang stops nearby. He's quite drunk and harshly admonishes her for hanging out with the greasers. To avoid a fight, Cherry reluctantly goes with Bob.
Later the Socs ambush Ponyboy and Johnny by a park with a large fountain. The Socs dunk Ponyboy's head in the water, Johnny pulls out a switchblade and comes to defend his friend. Bob is left dead and everyone flees. Johnny and Ponyboy look for Dallas at a friend's house and he gives them some directions to hide out in an abandoned church in the next county. Johnny and Ponyboy hop a freight train and make their way, they 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". They cut their hair with pocket knives and Ponyboy dyes his hair bright blonde in an attempt to disguise themselves. The two spend several days playing cards, Pony reads "Gone With the Wind" to Johnny and trying to trap a rabbit that lives nearby. One morning, Pony wakes up early and sees the valley below the church in the sunrise, admiring it's beauty. He recites a Robert Frost poem, "Nothing Gold Can Stay" that Johnny takes to heart.
A few days later Dallas arrives in a convertible T-Bird and takes them out for a burger. 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 in prison. 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 follows. In the smoke and fire Johnny is badly burnt and his back is broken when the roof collapses. Dallas pulls both of them to safety. EMS finally arrive. The boys are all hailed as heroes, Ponyboy is happily reunited with Darrel and Sodapop.
The Socs and Greasers plan a big rumble to settle things. Cherry acts as the go-between, no knives or other weapons allowed, the fight 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 came to visit. Johnny doesn't want to see his mother, whom he feels doesn't care about him. When he orders the nurse to send her away, he faints. Pony and Two-Bit leave, obviously shaken by the encounter. When they visit Dallas, he is arguing with a nurse. Dallas asks about Johnny & the boys tells him the outcome doesn't look very 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 Ponyboy, despite signs of exhaustion, wants to join. Darrell reluctantly lets him participate, telling he and Soda to run from the fight if the cops arrive. The Socs arrive and as a pouring rain starts 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 whoop 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 phase 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". He dies and Dallas becomes incredibly upset, waving a pistol at a doctor and babbling madly. Pony heads home to find Darrell and the rest of the gang nursing their wounds. Pony tells them that Johnny died and Dallas left in a fury. Pony is worried Dallas will have a meltdown. Dallas robs a corner store (U-Tote-M) but 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 in a nearby park when he waves his gun at them. His friends arrive just as he dies, his last word is "Pony". Pony faints from his exhaustion.
At home Darrel rides Ponyboy, Sodapop runs off into the night. The three brothers join up 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 the trial Cherry gives her testimony and Ponyboy is declared not guilty. All are happy. Back at school Ponyboy is now neatly dressed and coiffed, Cherry ignores him and a teacher gives him another chance to finish his assignment. At home at his study desk he 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."