Drought episodes are predicted to increase their intensity and frequency globally, which will have a particular impact on forest vitality, productivity, and species distribution. However, the impact of tree species interaction on forest vulnerability to drought is not yet clear. This study aims to assess how deciduous saplings react to drought and whether tree species diversity can buffer the impact of drought stress on tree saplings. Based on field measurements of crown defoliation and species diversity, vulnerability, drought recovery, and species interaction were analyzed. Fieldwork was carried out in Central Eastern Germany in 2018 during the vegetation season and repeated in 2019. Ten random saplings were measured in each of the 218 plots (15 × 15 m) with 2051 saplings in total out of 41 tree species. We found that 65% of the saplings experienced defoliation during the drought of 2018, of which up to 13% showed complete defoliation. At the species level, Fagus sylvatica L. and Betula pendula Roth. saplings were less affected (<55%), whereas Carpinus betulus L., Sorbus aucuparia L., and Frangula alnus Mill. saplings were the most affected (≥85%). One year later, in 2019, C. betulus and S. aucuparia had a faster recovery rate than F. sylvatica, B. pendula, Quercus spp., and Crataegus spp. (p < 0.001). Furthermore, we showed that forest stands with high sapling species diversity had a reduced vitality under drought stress (p < 0.001), indicating a higher competition for resources. The study provides evidence that F. sylvatica saplings can withstand and survive persistent drought. Species-specific responses to drought are essential to be considered for implementing adaptive forest management strategies to mitigate the impact of climate change.