Climate change will influence plant photosynthesis by altering patterns of temperature and precipitation, including their variability and seasonality. Both effects may be important for peatlands as the carbon (C) sink potential of these ecosystems depends on the balance between plant C uptake through photosynthesis and microbial decomposition. Here, we show that the effect of climate warming on Sphagnum community photosynthesis toggles from positive to negative as the peatland goes from rainy to dry periods during summer. More particularly, we show that mechanisms of compensation among the dominant Sphagnum species (Sphagnum fallax and Sphagnum medium) stabilize the average photosynthesis and productivity of the Sphagnum community during summer despite rising temperatures and frequent droughts. While warming had a negligible effect on S. medium photosynthetic capacity (A_max) during rainy periods, A_max of S. fallax increased by 40%. On the opposite, warming exacerbated the negative effects of droughts on S. fallax with an even sharper decrease of its A_max while S. medium A_max remained unchanged. S. medium showed a remarkable resistance to droughts due to anatomical traits favouring its water holding capacity. Our results show that different phenotypic plasticity among dominant Sphagnum species allow the community to cope with rising temperatures and repeated droughts, maintaining similar photosynthesis and productivity over summer in warmed and control conditions. These results are important because they provide information on how soil water content may modulate the effects of climate warming on Sphagnum productivity in boreal peatlands. It further confirms the transitory nature of warming‐induced photosynthesis benefits in boreal systems and highlights the vulnerability of the ecosystem to excess warming and drying.