In order to study the formation mechanism of residual stress of 7050 aluminum alloy sheet surface by laser shock processing, the samples are processed by laser beam with five different power densities. The dynamic strain induced by laser shock processing sheet samples is measured by the polyvinylidene fluoride (PVDF) piezoelectric sensor. Residual stress distribution after laser shock processing is measured by the X-ray stress analyser. Three-dimensional microscopy system is used to observe the surface microstructure by laser shock processing. The results show that when the power density is 1.02 GW/cm2, the transverse deformation induced by laser shock is small. When the power density is 1.53 GW/cm2, both of the surface rarefaction wave and transverse deformation result in the equal-biaxial distribution of the maximum principal stress on the sample surface. When the power densities are 1.98 GW/cm2 and 2.77 GW/cm2, the center of the impact region is 5.680 μm and 10.800 μm higher than the adjacent part, respectively. The shock wave which is reflected back and forth and the surface rarefaction wave cause the occurrence of residual stress hole. When the power density is 4.07 GW/cm2, the sample impact area has a large plastic deformation and is relatively smooth, the maximum residual principal stress distribution is uniform.