U.S. law firms closed 2025 on strong financial footing, but new data suggests the momentum may not carry into the year ahead. A growing gap between rising law firm expenses and tightening client budgets is forcing firms to confront a familiar question: how long will clients tolerate higher billing rates?
A new report from the Thomson Reuters Institute warns that the legal market could face a slowdown in 2026 if corporate clients rein in spending. Large and midsized firms posted impressive results last year, with profits up sharply and demand rising across both transactional and litigation practices. However, analysts say those gains may mask structural risks.
The legal industry has a history of boom-and-bust cycles. Firms often expand aggressively during strong years, only to struggle when conditions shift. According to the report, that pattern could reemerge if clients resist further rate increases at the same time firms absorb higher costs linked to hiring and technology.
Billing rates emerge as fault line for 2026
Law firm expenses climbed rapidly in 2025. Technology spending rose close to 10%, while lawyer compensation increased by nearly 8% on average. Despite those pressures, profits grew about 13% across large and midsized firms. Billing rates played a central role, rising more than 7% at large firms and offsetting slower growth in demand.
That strategy may face limits. The report suggests demand will cool somewhat in 2026, even as economic and geopolitical uncertainty continues to generate legal work. The bigger uncertainty lies with clients. Corporate legal departments have already shown greater sensitivity to costs, particularly in the second half of last year.
During that period, clients shifted work toward lower-cost midsized firms. Demand at those firms grew nearly 5%, compared with less than 2% at the largest U.S. firms. The trend signals a willingness among clients to reconsider long-standing relationships when fees rise too quickly.
Generative artificial intelligence adds another layer of pressure. As AI tools become more common, clients may scrutinize legal bills more closely and question whether hourly rates still reflect value. Analysts say firms that successfully show how AI improves efficiency could continue raising rates. Others may struggle if clients decide to bring more work in-house.
The report also points to a longer-term risk. If in-house legal teams combine Big Law experience with advanced AI capabilities, they may reduce reliance on outside firms for entire categories of work. That shift could weaken demand precisely when firms face higher fixed costs.
Separate disclosures released this week shed light on the economics at the top of the market. Ethics filings from senior U.S. Justice Department officials revealed multimillion-dollar earnings from firms such as Jones Day and Williams & Connolly before those lawyers entered government service. The figures underscore how profitable elite firms remain, even as questions grow about sustainability.
Looking ahead, 2026 is expected to bring continued activity in litigation, class actions, and regulatory disputes. At the same time, firms may need to adjust pricing strategies to avoid triggering a client backlash. The coming year could test whether billing rates remain a reliable engine of growth or become the catalyst for a broader downturn in the legal market.
