Remotely sensed microwave observations of vegetation optical depth (VOD) have been widely used for examining vegetation responses to climate. Nevertheless, the relative impacts of phenological changes in leaf biomass and water stress on VOD have not been explicitly disentangled. In particular, determining whether leaf water potential ($\Psi_L$) affects VOD may allow these data sets as a constraint for plant hydraulic models. Here we test the sensitivity of VOD to variations in $\Psi_L$ and present a conceptual framework that relates VOD to $\Psi_L$ and total biomass including leaves, whose dynamics are measured through leaf area index, and woody components. We used measurements of $\Psi_L$ from three sites across the US—a mixed deciduous forests in Indiana and Missouri and a piñon‐juniper woodland in New Mexico—to validate the conceptual model. The temporal dynamics of X‐band VOD were similar to those of the VOD signal estimated from the new conceptual model with observed $\Psi_L$ ($R^2$ = 0.6–0.8). At the global scale, accounting for a combination of biomass and estimated $\Psi_L$ (based on satellite surface soil moisture data) increased correlations with VOD by ~ 15% and 30% compared to biomass and water potential, respectively. In wetter regions with denser and taller canopy heights, VOD has a higher correlation with leaf area index than with water stress and vice versa in drier regions. Our results demonstrate that variations in both phenology and $\Psi_L$ must be considered to accurately interpret the dynamics of VOD observations for ecological applications.