A reply to /u/Master_of_Pokemon

Perhaps this previous post on Spain is helpful. Or this one more focused on the early Habsburg empire.

The Spanish empire of the 16th century happened mostly through inheritance, something already covered in several threads here and here.

On one hand we can simplistically say that Spain suffered from imperial overstretch. But the fact is that they were able to maintain an empire even as they teetered from one crisis to another for centuries. Regardless, in hindsight they appear to have missed some key opportunities: the pacification of the Netherlands, the over-complication of the Armada plans, and inability to contain their enemies.

As for Portugal, her succession crisis following the demise of King Sebastian forced her into a personal union with Spain, such that Spain's enemies also became Portugal's enemies. This led to losses at home and abroad.

Charles V inherited separate lands, and separate kingdoms/counties/duchies in Spain, Burgundy, Low Countries, Italy, Austria and Germany. Spain still consisted of several kingdoms, each with its own rules: Castille and Leon, Aragon, Navarre. Castille had the most developed taxation system. Aragon was stagnating, Navarre was a new acquisition. Charles V put significant effort in extracting further revenue from Castille to finance his needs and commitments elsewhere. By contrast, he didn't put nearly as much effort with Aragon/Catalonia and Navarre.

Despite Charles V's earlier wish to pass on his entire set of possessions to his son Philip II, he was opposed by his brother Ferdinand, who acted as his regent in Austria, the HRE, and Hungary. As a result, the Habsburg inheritance had to be divided.

Philip II inherited Spain's kingdoms, Italian lands and Balearic islands via Aragon, and Burgundy and the Low Countries. As he approached retirement, Charles V had cultivated a northwestern orbit between Spain, England (as Philip II was married to Mary Tudor), the Low Countries. However, as we know Elizabeth succeeded Mary Tudor and brought England away to eventually become an enemy of Spain. This made his efforts in the Low Countries, namely the Eighty Years' war between Spain and Dutch rebels, more difficult and much more expensive, such that he declared bankruptcy multiple times. This, and inflations, means that Castille's artisan class couldn't develop and it remained a raw materials producer.

In the Mediterranean he had to contend with the rise of the Ottomans and their allies Barbary pirates. This means more expenses, reliance of Genoese navies and monies, just to maintain the link between continental Spain, the Balearic islands, Sicily, Naples. Because Castille was the cash cow, it was made to focus on sheep herding at the cost of crops, and Spain had to rely on Balearic islands and Sicily for grain shipments.

Regardless, Philip II's victory in Lepanto checked Ottoman advance even if he failed in the Atlantic. Further, Portugal's young king Sebastian embarked on an ill-advised expedition to North Africa with his court, resulting in the demise of the house of Aviz. Sensing both danger and opportunity, Philip II pressed his claim on Portugal and won the battle, bringing both Portugal and the crowns of Spain under personal union.

As he was at war against the Netherlands rebels and France, and eventually against England, these parties were no longer allowed to trade in Lisbon, and further they had incentive to attack Portuguese ships and posts around the world.

By that point Spain and Portugal had set up parallel trading routes with little overlap. Thus, while on the one hand Portugal now had access to sell goods to Spanish posts (including notably slave trade), Portugal was dragged into Spain's wars with little protection from Spain. In 1592 England captured a Portuguese fleet returning from Asia, thus setting the stage for England's own interest in the region.

The Dutch, previously partners in Portuguese development of sugar cane plantations in Brazil, attacked Portugal there to gain control of their own plantations. In Asia, they set up their own base in Batavia (today's Jakarta), then attacked Portugal's important posts in Angola, then in Goa, then in Japan.

Philip III and IV had opportunities to settle the Dutch rebellion, but both failed. Philip IV in particular failed to centralize the government in Spain, thus falling behind France's centralizing efforts.

Eventually, with Charles II the question of succession became paramount as he could not produce an offspring. The Bourbon candidate, descendant of Louis XIV, won the war of Spanish succession, ending the Habsburg line.

If you're interested in the Bourbon era you can read this post.