This study evaluated the longitudinal stability and functional correlates of social cognition during the early course of schizophrenia. Fifty-five first-episode schizophrenia patients completed baseline and 12-month follow-up assessments of 3 key domains of social cognition (emotional processing, theory of mind, and social/relationship perception), as well as clinical ratings of real-world functioning and symptoms. Scores on all 3 social cognitive tests demonstrated good longitudinal stability with test-retest correlations exceeding .70. Higher baseline and 12-month social cognition scores were both robustly associated with significantly better work functioning, independent living, and social functioning at the 12-month follow-up assessment. Furthermore, cross-lagged panel analyses were consistent with a causal model in which baseline social cognition drove later functional outcome in the domain of work, above and beyond the contribution of symptoms. Social cognitive impairments are relatively stable, functionally relevant features of early schizophrenia. These results extend findings from a companion study, which showed stable impairments across patients in prodromal, first-episode, and chronic phases of illness on the same measures. Social cognitive impairments may serve as useful vulnerability indicators and early clinical intervention targets.