Importance: The development of adverse clinical outcomes in patients with psychosis has been associated with behavioral and neuroanatomical deficits related to emotion processing. However, the association between alterations in brain regions subserving emotion processing and clinical outcomes remains unclear. Objective: To examine the association between alterations in emotion processing and regional gray matter volumes in individuals at clinical high risk (CHR) for psychosis, and the association with subsequent clinical outcomes. Design, setting, and participants: This naturalistic case-control study with clinical follow-up at 12 months was conducted from July 1, 2010, to August 31, 2016, and collected data from 9 psychosis early detection centers (Amsterdam, Basel, Cologne, Copenhagen, London, Melbourne, Paris, The Hague, and Vienna). Participants (213 individuals at CHR and 52 healthy controls) were enrolled in the European Network of National Schizophrenia Networks Studying Gene-Environment Interactions (EU-GEI) project. Data were analyzed from October 1, 2018, to April 24, 2019. Main measures and outcomes: Emotion recognition was assessed with the Degraded Facial Affect Recognition Task. Three-Tesla magnetic resonance imaging scans were acquired from all participants, and gray matter volume was measured in regions of interest (medial prefrontal cortex, amygdala, hippocampus, and insula). Clinical outcomes at 12 months were evaluated for transition to psychosis using the Comprehensive Assessment of At-Risk Mental States criteria, and the level of overall functioning was measured through the Global Assessment of Functioning [GAF] scale. Results: A total of 213 individuals at CHR (105 women [49.3%]; mean [SD] age, 22.9 [4.7] years) and 52 healthy controls (25 women [48.1%]; mean [SD] age, 23.3 [4.0] years) were included in the study at baseline. At the follow-up within 2 years of baseline, 44 individuals at CHR (20.7%) had developed psychosis and 169 (79.3%) had not. Of the individuals at CHR reinterviewed with the GAF, 39 (30.0%) showed good overall functioning (GAF score, ≥65), whereas 91 (70.0%) had poor overall functioning (GAF score, <65). Within the CHR sample, better anger recognition at baseline was associated with worse functional outcome (odds ratio [OR], 0.88; 95% CI, 0.78-0.99; P = .03). In individuals at CHR with a good functional outcome, positive associations were found between anger recognition and hippocampal volume (ze = 3.91; familywise error [FWE] P = .02) and between fear recognition and medial prefrontal cortex volume (z = 3.60; FWE P = .02), compared with participants with a poor outcome. The onset of psychosis was not associated with baseline emotion recognition performance (neutral OR, 0.93; 95% CI, 0.79-1.09; P = .37; happy OR, 1.03; 95% CI, 0.84-1.25; P = .81; fear OR, 0.98; 95% CI, 0.85-1.13; P = .77; anger OR, 1.00; 95% CI, 0.89-1.12; P = .96). No difference was observed in the association between performance and regional gray matter volumes in individuals at CHR who developed or did not develop psychosis (FWE P < .05). Conclusions and relevance: In this study, poor functional outcome in individuals at CHR was found to be associated with baseline abnormalities in recognizing negative emotion. This finding has potential implications for the stratification of individuals at CHR and suggests that interventions that target socioemotional processing may improve functional outcomes.