It is narrated from Sayyiduna Abu Musa Ash'ari (may Allah be pleased with him) that the Jews used to sneeze in the presence of the Prophet (peace and blessings of Allah be upon him) hoping that he would supplicate for them with «يرحمكم الله», but the Prophet (peace and blessings of Allah be upon him) would say: «يهديكم الله ويصلح بالكم» May Allah guide you and set your affairs right.
It is narrated in a similar manner from Sayyiduna Abu Musa (may Allah be pleased with him) through another chain of narration.
Hadith Referenceالادب المفرد / كتاب العطاس والتثاؤب / 940
Hadith Gradingالألبانی:صحيح
Hadith Takhrij«صحيح : جامع الترمذي ، الأدب ، ح : 2739 و سنن أبى داؤد ، الأدب ، ح : 5038»
Explanation & Benefits
Shaykh Maulana Usman Muneeb
Benefits and Issues: From this, it is understood that the People of the Book—Jews and Christians—as well as other disbelievers, should not be given the response to sneezing, even if they say "alhamdulillah." However, it is certainly appropriate to supplicate for their guidance.
Source: Fadlullah al-Ahad: Urdu Commentary on al-Adab al-Mufrad, Page: 940