Industry analysts are saying they see the warning signs: It’s likely that law firm profits will begin to decline in 2026. Many factors are involved. From monumental expense growth and poor economic fundamentals to shifting client power and technological disruption, law firms are standing on unstable ground as we head into the new year.

Actually, Last Year Was Great

The truth is that the average law firm had a great 2025. According to the 2026 State of the Legal Market report published by the Thomson Reuters Institute and the Center on Ethics and the Legal Profession at Georgetown Law, the average law firm achieved 13% profit growth last year with demand surging to its best year of growth since the Global Financial Crisis.

The 2025 AM Law 100, a definitive ranking of the 100 largest law firms in the United States, reported similarly booming numbers, with total gross revenue for Am Law 100 law firms growing to $158.3 billion.

The third quarter of 2025 saw a significant surge in demand for legal services, particularly in transactional work. This reflected an active corporate environment that continued to make deals despite (or, in some cases, because of) global uncertainty. But it’s interesting to note that industry trends showed smaller firms capturing the lion’s share of that growth instead of big law. Experts assessed that demand moved from the most expensive law firms to lower-cost options.

With increased demand came increased law firm worked rates (what law firms really billed when you factor in the discounts and deals). These experienced 7.3% growth last year. So, lawyers worked hard, they charged more, and they made a lot of money. And they did it at both big and small law firms.

Last Year’s Growth Was Built on Uncertain Foundations

But a close examination of the numbers show that much of that growth may have been built on uncertainty—related to both decisions made by law firm leaders and situations beyond their control. In many cases, the distinction is blurry. It’s challenging to categorize a factor as purely external without recognizing the business’s response to it.

Costs Are Rising for Law Firms

For starters, the cost of running a law firm is growing. 2026 finds law firms spending more on technology, including investing aggressively in AI capabilities. This probably comes as a response to the AI pressures that all businesses are experiencing. Nobody wants to be left out of the race to adopt and effectively use this booming new technology.

It’s interesting to note, though, that 90% of legal dollars still flow through billable hours. While law firms seem to see AI as the future, they’re not quite there yet. This experience actually mirrors AI adoption across industries. Everyone is adjusting, not just lawyers. While businesses haven’t quite figured out how much value they’re going to get from AI, they’re still paying a lot for it.

Law firms are also expanding headcount. To get the best and brightest attorneys in the door and on the payroll, they’re having to offer higher salaries. These increased costs are sustainable only if the demand for legal services keeps going up too. Once demand drops, law firms might be faced with businesses that are very expensive to run. They’re in a risky situation.

Demand May Drop: For General Counsel, Anticipated Legal Spend Is Down

The 2026 State of the Legal Market report asked in-house general counsels (GCs) who how much they plan to spend on outside legal services in 2026. These “net spend anticipation” numbers weren’t great. Only about 35% of those surveyed said that they plan to increase their net spending, compared to 22% who said they were going to decrease their spending — a net of 13%. Earlier in the year, the net spend figure was closer to 19%.

The report also found that today’s GCs are scrutinizing their budgets and asking pointed questions about efficiency. When their own legal departments can use Generative Artificial Intelligence (GenAI) to handle routine legal work, there’s no need to pay an outside firm’s high rates. GCs are definitely looking ahead and hoping their own tech investments pay off with savings instead of legal fees.

Thomson Reuters forecasts that demand growth will slip to about 1.7% for Q1 of this year, and then -0.7% for Q2 and Q3. Legal demand is predicted to trend downward, in general, and probably for similar reasons.

Law Firms Have Always Faced Boom-and-Bust Cycles

History teaches us that there are patterns to law firm growth. Current legal market dynamics (booming demand combined with instability and increasing expenses) mirror the dynamics that have been in place before previous industry downturns. The legal industry has a history of soaring just before it stumbles.

We saw these same conditions in 2007, just prior to the Great Recession. Heading into the Great Recession, law firms were busy and profitable. But they were also juggling increased costs. As things shifted and businesses were unable to obtain the credit they needed to maintain operations at current levels, law firms were forced to lay off their attorneys.

Large businesses with in-house general counsels faced the same challenges. With a financial downturn, they were forced to rely more on their own staff instead of hiring outside firms. This further affected the legal market. Fewer corporate clients meant decreased law firm profits during an unstable period.

We saw similar conditions again in 2021 as law firms navigated the COVID-19 pandemic. Law firms, along with other businesses, felt the initial shock of the pandemic. But shortly afterward, business picked up. 2021 was actually a strong year for law firms. However, demand cooled the next year, and firms turned to layoffs and other cost-cutting strategies to keep their doors open.

So, are we sure that we can expect similar things for law firms in 2026? No. But, if you’re tracking the legal industry — or if you work in it — be prepared for a bumpy ride. The challenges ahead are significant, and things could get interesting.

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