diff --git a/.changes/v1.13/BUG FIXES-20250604-144021.yaml b/.changes/v1.13/BUG FIXES-20250604-144021.yaml
new file mode 100644
index 000000000000..21bd5249b7ac
--- /dev/null
+++ b/.changes/v1.13/BUG FIXES-20250604-144021.yaml	
@@ -0,0 +1,5 @@
+kind: BUG FIXES
+body: Nested module outputs could lose sensitivity, even when marked as such in the configuration
+time: 2025-06-04T14:40:21.12567-04:00
+custom:
+    Issue: "37212"
diff --git a/internal/terraform/context_plan2_test.go b/internal/terraform/context_plan2_test.go
index fb1451879781..6df225d5a855 100644
--- a/internal/terraform/context_plan2_test.go
+++ b/internal/terraform/context_plan2_test.go
@@ -6847,3 +6847,68 @@ data "test_data_source" "foo" {
 
 	}
 }
+
+func TestContext2Plan_sensitiveOutput(t *testing.T) {
+	m := testModuleInline(t, map[string]string{
+		"main.tf": `
+module "child" {
+  source = "./child"
+}
+
+output "is_secret" {
+  // not only must the plan store the output as sensitive, it must also be
+  // evaluated as such
+  value = issensitive(module.child.secret)
+}
+`,
+		"./child/main.tf": `
+output "secret" {
+  sensitive = true
+  value = "test"
+}
+`,
+	})
+
+	ctx := testContext2(t, &ContextOpts{})
+
+	plan, diags := ctx.Plan(m, states.NewState(), DefaultPlanOpts)
+	tfdiags.AssertNoErrors(t, diags)
+
+	expectedChanges := &plans.Changes{
+		Outputs: []*plans.OutputChange{
+			{
+				Addr: mustAbsOutputValue("module.child.output.secret"),
+				Change: plans.Change{
+					Action:         plans.Create,
+					BeforeIdentity: cty.NullVal(cty.DynamicPseudoType),
+					AfterIdentity:  cty.NullVal(cty.DynamicPseudoType),
+					Before:         cty.NullVal(cty.DynamicPseudoType),
+					After:          cty.StringVal("test"),
+				},
+				Sensitive: true,
+			},
+			{
+				Addr: mustAbsOutputValue("output.is_secret"),
+				Change: plans.Change{
+					Action:         plans.Create,
+					BeforeIdentity: cty.NullVal(cty.DynamicPseudoType),
+					AfterIdentity:  cty.NullVal(cty.DynamicPseudoType),
+					Before:         cty.NullVal(cty.DynamicPseudoType),
+					After:          cty.True,
+				},
+			},
+		},
+	}
+	changes, err := plan.Changes.Decode(nil)
+	if err != nil {
+		t.Fatal(err)
+	}
+
+	sort.SliceStable(changes.Outputs, func(i, j int) bool {
+		return changes.Outputs[i].Addr.String() < changes.Outputs[j].Addr.String()
+	})
+
+	if diff := cmp.Diff(expectedChanges, changes, ctydebug.CmpOptions); diff != "" {
+		t.Fatalf("unexpected changes: %s", diff)
+	}
+}
diff --git a/internal/terraform/evaluate.go b/internal/terraform/evaluate.go
index e3151ea654d1..573b937bf0e6 100644
--- a/internal/terraform/evaluate.go
+++ b/internal/terraform/evaluate.go
@@ -430,7 +430,7 @@ func (d *evaluationStateData) GetModule(addr addrs.ModuleCall, rng tfdiags.Sourc
 		namedVals := d.Evaluator.NamedValues
 		moduleInstAddr := absAddr.Instance(instKey)
 		attrs := make(map[string]cty.Value, len(outputConfigs))
-		for name := range outputConfigs {
+		for name, cfg := range outputConfigs {
 			outputAddr := moduleInstAddr.OutputValue(name)
 
 			// Although we do typically expect the graph dependencies to
@@ -446,6 +446,9 @@ func (d *evaluationStateData) GetModule(addr addrs.ModuleCall, rng tfdiags.Sourc
 				continue
 			}
 			outputVal := namedVals.GetOutputValue(outputAddr)
+			if cfg.Sensitive {
+				outputVal = outputVal.Mark(marks.Sensitive)
+			}
 			attrs[name] = outputVal
 		}