Sleep and stress independently enhance emotional memory consolidation. In particular, theta oscillations (4-7 Hz) during rapid eye movement (REM) sleep increase coherence in an emotional memory network (i.e., hippocampus, amygdala, and prefrontal cortex) and enhance emotional memory. However, little is known about how stress during learning might interact with subsequent REM theta activity to affect emotional memory. In the current study, we examined whether the relationship between REM theta activity and emotional memory differs as a function of pre-encoding stress exposure and reactivity. Participants underwent a psychosocial stressor (the Trier Social Stress Task; n = 32) or a comparable control task (n = 32) prior to encoding. Task-evoked cortisol reactivity was assessed by salivary cortisol rise from pre- to post-stressor, and participants in the stress condition were additionally categorized as high or low cortisol responders via a median split. During incidental encoding, participants studied 150 line drawings of negative, neutral, and positive images, followed by the complete color photo. All participants then slept overnight in the lab with polysomnographic recording. The next day, they were given a surprise recognition memory task. Results showed that memory was better for emotional relative to neutral information. Critically, these findings were observed only in the stress condition. No emotional memory benefit was observed in the control condition. In stressed participants, REM theta power significantly predicted memory for emotional information, specifically for positive items. This relationship was observed only in high cortisol responders. For low responders and controls, there was no relationship between REM theta and memory of any valence. These findings provide evidence that elevated stress at encoding, and accompanying changes in neuromodulators such as cortisol, may interact with theta activity during REM sleep to promote selective consolidation of emotional information. © 2019 Wiley Periodicals, Inc.