Cannabis Sector Declines Amidst Diminished Federal Legalization Outlook

Green Thumb Industries Leads Cannabis Sector Lower on Regulatory Concerns

Green Thumb Industries (GTBIF) shares experienced a significant decline of over 7% on September 3, 2025, contrasting sharply with the S&P 500's 0.5% advance on the same day. This downturn reflects a broader bearish sentiment across the cannabis sector, triggered by a new industry poll indicating dampened optimism for federal marijuana policy reform.

Industry Poll Reveals Low Expectations for 2025 Rescheduling

The catalyst for the sector's decline was the release of the 2025 Financial Services Survey by Shield Compliance, a firm specializing in compliance management for financial institutions serving the cannabis industry. The poll surveyed 88 cannabis business leaders regarding the likelihood of marijuana rescheduling by the end of 2025, which would effectively serve as de facto federal legalization.

Respondents, on average, rated the probability of rescheduling at a mere 34% on a scale of 0 to 100. This low expectation persists despite an overwhelming consensus within the industry; 97% of participants stated that rescheduling and the associated tax relief are at least "somewhat important" for their businesses' long-term viability, with 61% deeming it "extremely important."

Tax Burdens and Banking Challenges Continue to Impede Growth

The market's adverse reaction is rooted in the critical financial implications of the current federal classification of cannabis. Under IRS Code Section 280E, cannabis businesses are prohibited from deducting normal business expenses, a restriction that leads to an effective federal tax rate significantly higher than traditional companies—reportedly as high as 50% for some operators like Greenlight Corporation.

Rescheduling cannabis from a Schedule I to a Schedule III drug under the U.S. Controlled Substances Act would eliminate the 280E tax burden, offering substantial financial relief to the industry. However, it is crucial to note that rescheduling would not address the separate, pervasive issue of limited access to basic banking services, which compels many licensed cannabis businesses to operate primarily in cash. A bipartisan coalition of 32 state and territory attorneys general has recently urged Congress to pass a marijuana banking bill to resolve this challenge.

Broader Market Context and Company Performance

The cannabis sector has historically been sensitive to regulatory speculation, experiencing rallies on positive signals—such as former President Donald Trump's social media posts hinting at reclassification or early movements by the Biden administration—only to recede when concrete policy changes fail to materialize. The current downturn underscores the market's weariness regarding legislative delays.

Despite the sector-wide uncertainty, Green Thumb Industries reported robust financial performance for Q2, with revenues reaching $293.3 million, an increase both quarter-over-quarter and year-over-year. The company generated $56 million in cash flow from operations, and its assets substantially outweigh its liabilities, with manageable debt levels. While price compression due to competition and high operating expenses have impacted gross margins (49.88% for Q2) and led to a net loss of $0.6 million from asset sales, the company's underlying financial health suggests a potential undervaluation, trading near its book value per share and NAV value per share.

However, the macro-regulatory environment remains the dominant factor influencing stock prices. The stock price of GTBIF and other Multi-State Operators (MSOs) has seen significant flux, with a 59% gain over the last six months, often fueled by fleeting hopes of reform. Peers like Curaleaf (which leads in one-year gains due to robust international sales) and Cresco Labs (considered undervalued) also navigate this volatile landscape.

Outlook: Continued Regulatory Watch and Sector Pressures

The outlook for the cannabis industry, particularly for companies like Green Thumb Industries, remains heavily contingent on federal policy evolution. While sales are projected to exceed $50 billion in 2025, major hurdles including banking restrictions, complex state regulations, market consolidation, and increasing competition from established alcohol and tobacco industries are expected to persist.

Investors will be closely watching for developments from the U.S. Drug Enforcement Agency (DEA), which is anticipated to issue a final rule on cannabis scheduling in the latter half of 2025. Without meaningful federal policy changes, including both rescheduling and addressing banking access, cannabis companies are likely to face ongoing operational and financial struggles, hindering their growth and profitability. Investor sentiment is expected to remain cautious, with any rallies susceptible to reversal in the absence of new, concrete regulatory advancements.