Wood is an abundant and essential renewable resource whose production is threatened in some parts of the world by drought. A better understanding of the molecular mechanisms underlying wood formation during drought is critical to maintaining wood production under increasingly adverse environmental conditions. In this study, we investigated wood formation in black cottonwood (Populus trichocarpa) during drought stress. The morphological changes during drought stress in P. trichocarpa included the wilting and drooping of leaves, stem water loss, and a reduction in whole plant biomass. The water embolism rate indicated that the water transport in stems was blocked under drought conditions. An anatomical analysis of the xylem and cambium revealed that drought stress changed the structure of vessel cells, increased lignin accumulation, and decreased the cambium cell layers. We subsequently identified 12,438 and 9156 differentially expressed genes from stem xylem and cambium tissues under well-watered and drought conditions, respectively. Gene Ontology (GO) and Kyoto Encyclopedia of Genes and Genomes (KEGG) enrichment analyses revealed that these genes were mainly involved in hormone signal transduction and amino sugar and nucleotide sugar metabolism. To further explore the molecular mechanism of wood formation in response to drought, we analyzed the expression patterns of the genes involved in lignin, cellulose, and hemicellulose biosynthesis in xylem and the genes involved in cambial activity in the cambium. To better understand the regulatory networks governing xylem development and cambium activity in response to drought, we analyzed the MYB (138), AP2 (130), bHLH (89), and NAC (81) transcription factor families to shed light on the interactions between the TFs in these families and the genes they regulate. Identifying the key genes that regulate wood formation in P. trichocarpa during drought provides a genetic foundation for further research on the molecular regulatory networks and physiology underpinning wood formation during drought stress.