US law firm profits leapt in 2025, but 'warning signs' loom

By Karen Sloan

Feb 10 (Reuters) - Large and midsized U.S. law firms ended 2025 with a profit surge, a new analysis of firm financial data found, but slowing demand for mergers and acquisitions work suggests 2026 could be leaner.

Law firm profits rose 14.1% in the fourth quarter of 2025 — the biggest year-over-year profit increase since the pandemic boom of 2021 and early 2022 — according to the Thomson Reuters Institute’s latest Law Firm Financial Index, released on Tuesday. The Thomson Reuters Institute and Reuters share the same parent company.

The supercharged final quarter cemented a strong year, said Bryce Engelland, a senior industry data analyst with the Thomson Reuters Institute, and was largely fueled by billing rate increases and slowing expense growth.

“2025 ended up being a spectacular year, but there are real warning signs going into 2026,” Engelland said.

Most worrisome for law firms was a deceleration in demand for transactional practices in the fourth quarter. M&A demand growth fell five percentage points from the third quarter, while bankruptcy demand picked up significantly in December, according to the report.

That could signal an upcoming decline in the U.S. economy, which historically has resulted in lower law firm profits. Countercyclical practices that typically thrive in a down economy, such as litigation, bankruptcy, labor, and employment tend to have lower billing rates than transactional practices, Engelland noted.

“Traditionally, law firms have had trouble with sustained high-tempo growth,” he said. “They tend to grow in bursts, then economic trouble arrives, and they go into a much rougher patch.”

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

An economic downturn could also spur corporate general counsels to ramp up their reliance on artificial intelligence tools and move more legal work in-house in a bid to cut costs, the authors warned.

Legal departments have already been moving work from higher-cost firms to midsized firms with lower billing rates, according to the report.

Read more:

Are law firms headed for a downturn? Billing rates may hold the key

US law firms saw demand surge in third quarter - report