U.S. law firms finished 2025 with a pronounced uptick in profitability, according to a new quarterly assessment from the Thomson Reuters Institute. The Law Firm Financial Index showed profits rose 14.1% in the fourth quarter of 2025, the biggest annual gain since the surge in 2021 and early 2022.
Thomson Reuters Institute senior industry data analyst Bryce Engelland attributed the profit increase primarily to higher billing rates combined with slower growth in expenses. Those two factors together supported a strong year for large and mid-sized firms, a result that industry analysts described as a "spectacular year" for the legal sector.
Despite the upbeat close to the year, the report highlighted several developments that temper expectations for 2026. Most prominent among these was a notable decline in demand for mergers and acquisitions work. M&A demand growth dropped five percentage points from the third quarter to the fourth quarter, a fall that signals reduced transactional activity at the end of the year.
At the same time, bankruptcy demand rose sharply in December. The report framed that increase as a potential warning sign for the U.S. economy, noting that historically economic downturns are associated with lower law firm profits. The index also emphasized that practices which often expand in downturns - litigation, bankruptcy, labor, and employment - typically carry lower billing rates than transactional work.
Engelland underscored the sector's vulnerability to cyclical shifts. "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 Law Firm Financial Index aggregates quarterly financial metrics from 195 large and mid-sized U.S. law firms. It tracks measures such as demand, productivity, billing rates, and expenses to provide a snapshot of industry performance.
Another caution noted in the report is the potential behavior of corporate clients in a downturn. The study warned that a weaker economy could lead corporate general counsels to increase their use of artificial intelligence tools and bring more legal work in-house as a cost-reduction measure. That shift would reduce the volume of external legal work and could pressure outside law firm revenues.
While the fourth-quarter results capped a strong calendar year, the report’s mix of slowing transactional demand and rising bankruptcy activity leaves the sector facing uncertainties as it enters 2026.
Key points
- Profits at U.S. law firms rose 14.1% in Q4 2025, the largest year-over-year increase since the 2021-2022 pandemic period.
- Higher billing rates and slower expense growth were the primary drivers of the profit gain.
- M&A demand fell by five percentage points from Q3 to Q4, while bankruptcy demand rose sharply in December.
Risks and uncertainties
- A sustained decline in M&A activity could weigh on revenues for firms heavily reliant on transactional work - affecting corporate legal services and financial advisory markets.
- An increase in bankruptcy work, if signaling broader economic weakening, could lead to lower overall law firm profits as clients shift toward lower-billed, countercyclical practices.
- Greater adoption of AI tools and in-house legal staffing by corporate general counsels during a downturn could reduce demand for outside counsel, pressuring external legal spend.