That's an incredibly complex question so it's very difficult to pinpoint a single reason because many moving forces coincided to slowly depress the Spanish power base until it was no longer a great power.

First I think it's useful to discard a few myths and misconceptions. The Spanish Empire did not instantly decline because of the failed Spanish Armada. It is important to note that the English Counter-Armada launched the following year was as much of a debacle. The Spanish Armada was more of a symptom than a cause of anything. Even through the 1700s Spain was a great power and under the leadership of competent Bourbon monarchs it experienced a significant bounce back that should not be neglected. It is also important to note that even in the 1930s Spain was geopolitically important (as demonstrated by the proxy Civil War) and today remains an important cultural center and developed economy. Madrid and Barcelona are major world cities today.

However, there were definitely problems with the Spanish Empire and they begun in the 1500s so let's take a look at a few.

One major reason behind Spanish decline was the Protestant Reformation. Luther and the movements he inspired critically weakened the Holy Roman Empire and thus weakened the Austrian arch dukes, critical allies (the same monarch under Charles V) in the battle against France. The rise of Protestantism also played a major role in spoiling relations between the English and Spanish, who had previously cooperated against the French in the Italian Wars. Remember that Queen Mary of England was Catholic and married Philip II of Spain and their alliance was based on mutual opposition to France. When Elizabeth succeeded the throne Philip had no interest in an alliance because he saw all Protestants as an aberration. Protestantism also created tensions in the crucial Low Countries, provinces that provided Spain with financing, expertise, and valuable trade. Philip's insistence on sending the Inquisition to the Netherlands was a huge exacerbator of tensions. Overall the Reformation put Spain in a weakened diplomatic position and harmed their relationship with their Low Country subjects.

Another major problem for Spain was economic. Initially, the Spanish government had an extensive and valuable control over the silver from the legendary mines at Potosí. As Spain began to conduct more wars, against England and France and the Ottoman Empire, they relied more and more on silver for their payments, leading to inflation and successive currency devaluations which bankrupted the Spanish state multiple times. Apart from the economic harm, it also was a major reason for Dutch independence, which led to the creation of yet another colonial rival and the loss of the valuable Northern Provinces.

Another problem facing the Spanish was the loss of valuable brainpower over time with the expulsion of first the Jews in 1492 and later the Moriscos (Arab Christians often suspected of being crypto-Muslims) in 1609. These groups had significant expertise that was difficult to replace (in the case of the Moriscos, they were an important component of the Valencian peasantry). The failure to innovate left them falling behind with the English navally and the Spanish tercio infantry was proving to be increasingly dated in the 30 Years War without serious modification to catch up with other Europeans.

By the end of the 30 years war, Spain was left very weakened, having been handed a serious military defeat by France, and eventually losing Rousillon in the war. The succession of ineffective von Habsburgs following Philip II helped accelerate the decline until the War of Spanish succession, when the throne was handed to the Bourbons.

The success of the Bourbons, especially Carlos III, to modernize the Spanish state to some extent shows that the Spanish were not in an unrecoverable state. Spain was still a Great Power throughout the 1700s, if not on the level of France or the newly formed Britain. It was not until the Peninsular War that disaster truly struck, as Spain in the chaos and aftermath lost all their South American colonies. During the 1800s, stagnant, regressive (or weak-willed) monarchs further weakened the Spanish state until the Spanish American war, where all airs of a Spanish Empire were ripped away.

I probably missed something here but that's only logical given how complex and multifaceted the question really is.

This is a similar question in case no one responds https://www.google.com/amp/s/amp.reddit.com/r/AskHistorians/comments/2d4jyw/what_happened_to_spain_to_cause_its_decline/

To talk about Spain in the 19th century, we must talk about Spain in the 17th century. That is the period many agree is the beginning of the decline. And to talk about Spain's decline we must also talk about Spain's rise to become a European and global power in the 16th century.

Part I: Habsburg Spain

The Spanish empire of the 16th century happened mostly through inheritance, something already covered in several threads here: 1, 2, 3.

To summarize, 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.

Using Castille's reliable tax base, Charles borrowed huge sums of money from German bankers. This was used to set up strategic partnerships, such as with Genoa, to provide naval power in the Mediterranean against the rising Ottomans.

The Casa de Contratación continued to control the Atlantic trade via Seville, and operated exclusively. Throughout the reign of the Habsburgs, Spain's colonies in the Americas were limited to sailing only to or from Seville. Inter-colonies trade was not allowed. The manufacture of many basic and important sailing equipment was not allowed, the colonies had to purchase all these from Spain. The Casa de Contratación collected taxes, and it alone approved trades and explorations. It also maintained all the navigational maps and secret information.

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 Queen Mary of England), the Low Countries. However, as we know Elizabeth succeeded Mary and brought England away to eventually become an enemy of Spain. This made his efforts in the Low Countries more difficult and much more expensive, such that he had to declare bankruptcy several 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. The Mediterranean situation is perhaps best illustrated by the question, why didn't the Holy League pursue further victories following the great battle of Lepanto? Just like real life, the lofty idea of bringing the fight directly to the Ottomans was thwarted by politics, politics, politics, and heretics. Philip II had to shift his priorities and resources all the time, often resulting in indecision and dissatisfaction among his subjects.

It is no wonder that Philip III and Philip IV relied on "favorites" such as Lerma and Olivares, as they simply wanted to avoid their predecessor's over-burdened personal life. While they had ideas of uniting the various kingdoms under a stronger central government, their efforts failed due to corruption and internal weaknesses. Conflict with France rose, and with that Olivares asked for Catalonia to contribute troops, funds, and housing for troops in the Pyreneean border. Unhappy, Catalonia rebelled. Sensing an opportunity, Portugal, who had been absorbed into a personal union under Philip II, also rebelled. The Thirty Years War and Eighty Years War saw Spain recognize the independence of the Netherlands in 1648 and lose much of its military prestige, with the battle of Rocroi often used as a convenient bookmark.

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.

At this point, it is important to quote J. H. Elliott's "Imperial Spain", which is that,

The reign of Charles V, in fact, saw three dangerous developments that were to be of incalculable importance for 16th and 17th century Spain. In the first place, it established the dominance of foreign bankers over the country's sources of wealth. Secondly, it determined that Castile would bear the main weight of the fiscal burden within Spain. In the third place, it ensured that within Castile the brunt of the burden was borne by those classes which were least capable of bearing it.