Microbes drive fundamental ecosystem processes, such as decomposition. Environmental stressors are known to affect microbes, their fitness, and the ecosystem functions that they perform; yet, understanding the causal mechanisms behind this influence has been difficult. We used leaf litter on soil surface as a model in situ system to assess changes in bacterial genomic traits and decomposition rates for 18 months with drought as a stressor. We hypothesized that genome-scale trade-offs due to investment in stress tolerance traits under drought reduce the capacity for bacterial populations to carry out decomposition, and that these population-level trade-offs scale up to impact emergent community traits, thereby reducing decomposition rates. We observed drought tolerance mechanisms that were heightened in bacterial populations under drought, identified as higher gene copy numbers in metagenome-assembled genomes. A subset of populations under drought had reduced carbohydrate-active enzyme genes that suggested-as a trade-off-a decline in decomposition capabilities. These trade-offs were driven by community succession and taxonomic shifts as distinct patterns appeared in populations. We show that trait-trade-offs in bacterial populations under drought could scale up to reduce overall decomposition capabilities and litter decay rates. Using a trait-based approach to assess the population ecology of soil bacteria, we demonstrate genome-level trade-offs in response to drought with consequences for decomposition rates.