When Canada legalized recreational cannabis in 2018, many believed that the United States wouldn’t be far behind. Optimism grew further when the 2018 Farm Bill legalized hemp nationwide, fueling hopes that full federal marijuana reform was within reach. Based on this confidence, investors envisioned a booming North American market, with cannabis stocks poised to become one of the decade’s hottest growth stories.

Six years later, that early promise has faded. Instead of the boom investors envisioned, cannabis equities have endured one of the most disappointing stretches in modern market history.

What Went Wrong?

Following the 2018 reforms, Canada-based licensed producers raced to list on U.S. exchanges with a bid to expand their operations globally. When these companies were listed, investors poured billions into them, betting on swift legalization across the nation. The hemp legalization even helped establish that a multi-billion-dollar opportunity awaited marijuana companies in the United States.

But those reforms never arrived. While marijuana is legal in many U.S. states, it is still illegal at the federal level. This forces producers to comply with a patchwork of state regulations, while enduring penalizing tax rules such as IRS Section 280E, which prevents cannabis businesses from deducting most operating expenses. Limited access to banking and capital markets has continued to force many operators to borrow debt at high interest rates, further squeezing margins in an increasingly competitive market.

Lawmakers remain deeply divided when it comes to marijuana legalization. Recently, attempts were made to “close the hemp loophole” by adding new restrictions to a House spending bill; they were subsequently removed after pushback from industry supporters. Though the newly appointed DEA Commissioner, Terrance Cole, has signaled a willingness to review marijuana’s federal classification, the lack of a clear timeline keeps this sector stuck in limbo.

Cannabis Stocks Under Pressure

At the time of listing on U.S. stock exchanges, Canada-based pure-play cannabis operators like Tilray Brands (TLRY Quick QuoteTLRY - Free Report) and Canopy Growth Corporation (CGC Quick QuoteCGC - Free Report) debuted with multi-billion-dollar valuations. Today, those shares are trading at a fraction of that value, weighed down by declining revenues and persistent losses. Even U.S.-based Green Thumb Industries (GTBIF Quick QuoteGTBIF - Free Report) — one of the few pure-play cannabis companies still valued north of a billion dollars — faces the same structural challenges, despite posting a full-year profit in 2024.

Some industry players have even shifted gears and pivoted to other areas. Tilray expanded its footprint in the craft beer and beverage alcohol segment, while Canopy Growth is focusing on health and wellness brands. Others are streamlining operations to survive until federal reform materializes.

The underperformance of Green Thumb, Tilray and Canopy Growth is in line with the broader sector. The AdvisorShares Pure US Cannabis ETF, widely seen as the benchmark for U.S. marijuana equities, has plunged 86% over the past five years, highlighting the prolonged and severe downturn in the industry.

What Can Turn It Around?

For cannabis stocks, the clearest catalyst remains U.S. federal reform. Descheduling or rescheduling marijuana could remove the tax burdens and improve banking access. This will likely attract the attention of institutional investors and open the U.S. stock exchange listings to more domestic operators.

International markets like Europe and Australia are opening up, with early movers reporting record growth. These expanding opportunities, coupled with any shift in U.S. policy, could finally set the stage for a long-awaited rebound.

Our Take

Investors should exercise caution and closely monitor how the legislation evolves in the coming weeks. The outcome of this proposal won’t just affect hemp-based revenues — it could reshape the broader trajectory of cannabis reform and legalization efforts across the United States.

For those still interested in cannabis exposure but wary of the volatility offered by pure-play cannabis stocks, it may be worth looking into unconventional names like Harmony Biosciences (HRMY Quick QuoteHRMY - Free Report) and Corbus Pharmaceuticals (CRBP Quick QuoteCRBP - Free Report) , which are tapping into the cannabis space to develop novel cannabinoid (CBD) medicines for different indications. While HRMY is developing a pharmaceutically manufactured synthetic CBD gel for rare neuropsychiatric conditions, CRBP is developing its CBD candidate to treat obesity.