US Law Firms Post Record 2025 Profits as Warning Signs Emerge for 2026

Large and mid-sized US law firms ended 2025 with a significant profit surge, according to a new analysis of firm financial data, but slowing demand for mergers and acquisitions (M&A) work suggests the year ahead could be more challenging.

 

Profits rose 14.1 per cent in the fourth quarter of 2025 — the largest year-on-year increase since the pandemic boom of 2021 and early 2022 — the Thomson Reuters Institute’s latest Law Firm Financial Index reported on Tuesday. The Institute and Reuters share the same parent company.

 

The robust final quarter cemented a strong year, driven largely by billing rate increases and slower expense growth, said Bryce Engelland, senior industry data analyst at the Thomson Reuters Institute.

 

“2025 was a spectacular year, but there are real warning signs as we head into 2026,” Engelland added.

 

Most concerning for law firms was a slowdown in demand for transactional practices in the fourth quarter. M&A demand growth fell five percentage points from the third quarter, while bankruptcy work surged in December, the report noted.

 

This could indicate a forthcoming decline in the US economy, which historically has resulted in lower law firm profits. Countercyclical practices such as litigation, bankruptcy, and labour and employment law, which tend to thrive in a downturn, generally have lower billing rates than transactional work, Engelland said.

 

“Traditionally, law firms experience bursts of high growth, followed by rougher patches when economic trouble arrives,” he explained.

 

The index compiles quarterly financial metrics from 195 large and mid-sized U.S. law firms, covering key factors such as demand, productivity, billing rates, and expenses.

 

An economic slowdown could also prompt corporate general counsels to increase their reliance on artificial intelligence tools and bring more legal work in-house to cut costs, the authors warned. Legal departments have already been shifting work from higher-cost firms to mid-sized firms with lower billing rates, the report added.

 

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