Defoliation by eastern spruce budworm is one of the most important natural disturbances in Canadian boreal and hemi-boreal forests with annual area affected surpassing that of fire and harvest combined, and its impacts are projected to increase in frequency, severity, and range under future climate scenarios. Deciding on an active management strategy to control outbreaks and minimize broader economic, ecological, and social impacts is becoming increasingly important. These strategies differ in the degree to which defoliation is suppressed, but little is known about the downstream consequences of defoliation and, thus, the implications of management. Given the disproportionate role of headwater streams and their microbiomes on net riverine productivity across forested landscapes, we investigated the effects of defoliation by spruce budworm on headwater stream habitat and microbiome structure and function to inform management decisions. We experimentally manipulated a gradient of defoliation among 12 watersheds during a spruce budworm outbreak in the Gaspésie Peninsula, Québec, Canada. From May through October of 2019-2021, stream habitat (flow rates, dissolved organic matter [DOM], water chemistry, and nutrients), algal biomass, and water temperatures were assessed. Bacterial and fungal biofilm communities were examined by incubating six leaf packs for five weeks (mid-August to late September) in one stream reach per watershed. Microbiome community structure was determined using metabarcoding of 16S and ITS rRNA genes, and community functions were examined using extracellular enzyme assays, leaf litter decomposition rates, and taxonomic functional assignments. We found that cumulative defoliation was correlated with increased streamflow rates and temperatures, and more aromatic DOM (measured as specific ultraviolet absorbance at 254 nm), but was not correlated to nutrient concentrations. Cumulative defoliation was also associated with altered microbial community composition, an increase in carbohydrate biosynthesis, and a reduction in aromatic compound degradation, suggesting that microbes are shifting to the preferential use of simple carbohydrates rather than more complex aromatic compounds. These results demonstrate that high levels of defoliation can affect headwater stream microbiomes to the point of altering stream ecosystem productivity and carbon cycling potential, highlighting the importance of incorporating broader ecological processes into spruce budworm management decisions.