Biophysical characteristics of sapwood and outer parenchyma water storage compartments were studied in stems of eight dominant Brazilian Cerrado tree species to assess the impact of differences in tissue capacitance on whole-plant water relations. The rate of decline in tissue water potential with relative water content (RWC) was greater in the outer parenchyma than in the sapwood for most of the species, resulting in tissue-and species-specific differences in capacitance. Sapwood capacitance on a tissue volume basis ranged from 40 to 160 kg m−3 MPa−1, whereas outer parenchyma capacitance ranged from 25 to only 60 kg m−3 MPa−1. In addition, osmotic potentials at full turgor and at the turgor loss point were more negative for the outer parenchyma compared with the sapwood, and the maximum bulk elastic modulus was higher for the outer parenchyma than for the sapwood. Sapwood capacitance decreased linearly with increasing sapwood density across species, but there was no significant correlation between outer parenchyma capacitance and tissue density. Midday leaf water potential, the total hydraulic conductance of the soil/leaf pathway and stomatal conductance to water vapour (gs) all increased with stem volumetric capacitance, or with the relative contribution of stored water to total daily transpiration. However, the difference between the pre-dawn water potential of non-transpiring leaves and the weighted average soil water potential, a measure of the water potential disequilibrium between the plant and soil, increased asymptotically with total stem capacitance across species, implying that overnight recharge of water storage compartments was incomplete in species with greater capacitance. Overall, stem capacitance contributes to homeostasis in the diurnal and seasonal water balance of Cerrado trees.