PURPOSE OF REVIEW: Poor psychosocial functioning in schizophrenia can be conceptualized as an early indicator of chronic neurodevelopmental illness. Alternatively, impaired psychosocial functioning could be the result of social and environmental factors associated with the onset of psychotic illness. We review recent evidence on psychosocial outcome in the early phases of psychotic illness, when young people are less removed from their developmental trajectory, any brain changes may be mutable and there may be greater opportunity for intervention. RECENT FINDINGS: In samples with first-episode psychosis, poor premorbid functioning, stable negative symptoms and impaired social cognition and neurocognition may indicate individuals likely to experience poor psychosocial outcome. There is also some evidence of social/environmental predictors of poor outcome. Recent findings from at-risk samples suggest similar patterns, although more research is needed. SUMMARY: It is likely that for some patients poor psychosocial outcome is the result of longstanding neurological changes, whereas for others it is related to the secondary consequences of having psychosis. We suggest that measuring psychosocial outcome in the early stages of psychosis is important for our understanding of the cause of schizophrenia, but argue for the importance of the patient's subjective view on their psychosocial recovery.