Verbal memory (VM) is one of the most affected cognitive domains in first-episode psychosis (FEP) and is a robust predictor of functioning. Given that healthy females demonstrate superior VM relative to males and that female patients show less-severe illness courses than male patients, this study examined whether normative sex differences in VM extend to FEP and influence functioning. Four hundred and thirty-five patients (299 males, 136 females) with affective or nonaffective psychosis were recruited from a catchment-based specialized FEP intervention service and 138 nonclinical controls (96 males, 42 females) were recruited from the same community. One of the two neurocognitive batteries comprising six cognitive domains (VM, visual memory, working memory, attention, executive function, processing speed) were administered at baseline. In patients, positive and negative symptoms were evaluated at baseline and functioning was assessed at 1-year follow-up. Patients were more impaired than controls on all cognitive domains, but only VM showed sex differences (both patient and control males performed worse than females), and these results were consistent across batteries. In patients, better baseline VM in females was related to better functioning after 1 year, mediated through fewer baseline negative symptoms. Supplemental analyses revealed these results were not driven by affective psychosis nor by age and parental education. Thus, normative sex differences in VM are preserved in FEP and mediate functioning at 1-year follow-up via negative symptoms. This study highlights the importance of investigating sex effects for understanding VM deficits in early psychosis and suggests that sex may be a disease-modifying variable with important treatment implications.