The Thomson Reuters Institute’s 2026 Report on the State of the US Legal Market, published this week, reads like a seismograph. Published in cooperation with Georgetown University Law Center’s Center on Ethics and the Legal Profession, the report reveals that while demand and profits remain elevated, underlying forces are unstable.
State of the US Legal Market: Seismic Shifts
“Law firms are facing a fundamental shift in the legal industry’s economic landscape, standing at a critical inflection point where they must navigate shifting client demands, rising expenses and a necessary transformation of their operating models,” said Raghu Ramanathan, president, Legal Professionals, Thomson Reuters, in a press release.
If you run a firm, here are the five highlights from the State of the US Market report that matter most, with practical steps to stay steady in 2026.
Table of contents
- State of the US Legal Market: Seismic Shifts
- 1. Demand Is Booming—and Moving
- 2. The Arms Race: Tech and Talent Spending Is Soaring
- 3. The Billing Model is Out of Whack
- 4. Buyer Sentiment is Cooling Fast
- 5. History Lesson: Beware the Peak-Before-the-Fall Pattern
- The Path Forward?
- The 2026 Report on the State of the US Legal Market: Peak Prosperity and the Fault Lines Below
1. Demand Is Booming—and Moving
It was yet another banner year in 2025, with one of the strongest demand surges since the financial crisis, and hours up across the board.
“Throughout 2025, evolving client expectations, regulatory changes, economic fluctuations, and technological advancements drove a surge in demand with law firms averaging 2.5% growth for the year and hitting a high of 4.4% in July,” says the report. And these results came despite being measured against 2024’s record-breaking performance.
But that growth didn’t land evenly. “Midsize firms surged ahead with nearly 5% demand growth in the latter half of the year while the Am Law 100 couldn’t crack 2%.”
Smaller and midsize firms captured more work as general counsel moved work downstream to manage budgets. According to the report, “GCs needed to do far more legal work with the same amount of money… shifting routine matters, and increasingly even moderately complex work, to those law firms charging in many cases 40% less.”
Meanwhile, the biggest firms focused on premium, high-stakes matters and saw profits soar.
What this means for you:
- Small to midmarket firms benefit as the market rewards disciplined pricing and credible capability. Clients will shift work for value.
- If you’re larger, don’t assume your brand will hold mid-market matters.
How to respond:
- Identify 2-3 practice areas where you can claim “mid-complexity excellence”— too important to commoditize, too expensive at the top. Build case studies showing outcomes, not hours.
- Formalize intake criteria for premium matters versus work that should be routed to lower-cost delivery within your firm or partner network. Clear lanes protect profitability and trust.
2. The Arms Race: Tech and Talent Spending Is Soaring
Technology spending grew at historically high rates, while lawyer compensation and support costs rose sharply. The average law firm’s spending on technology and knowledge management tools grew an astonishing 9.7% and 10.5% as firms raced to leverage GenAI to improve efficiency, drive value and compete for business at a higher level.
On the talent side, firms are hiring, not cutting, with many layering AI on top of the current workforce rather than replacing headcount.
According to the report, direct spending on lawyer compensation jumped 8.2% compared to 2024, which itself was a year that saw growth at double the rate of core inflation growth. This isn’t targeted spending on a few lateral hires —it’s broad-based compensation growth across every level.
“Per-lawyer spending on associates jumped 3.8%, while compensation for everyone else rose 4.9%. With direct expenses already consuming almost one-third (32%) of the average firm’s revenue, this is a substantial portion of a firm’s overall budget.”
What this means for you:
- If tech spend isn’t anchored to client use case (with measurable ROI), it’s risk, not strategy.
- The math works—for now—because demand and rates are carrying it. But talent costs are sticky. Once you lift compensation, you carry it through a downturn.
How to respond:
- Attach every significant AI purchase to a client promise: faster diligence, standardized playbooks, fewer write-downs.
- Track two KPIs monthly: write-offs on associate hours first-draft cycle time. If AI decreases both, you’re on the right path. If not, reallocate or retrain.
- Build a lightweight project management team to prioritize tech projects, kill what doesn’t deliver, and standardize rollout and measurement.
3. The Billing Model is Out of Whack
Will AI finally kill the billable hour? According to the report, 90% of dollars still flow through standard hourly billing. This creates “almost absurd tension that sees firms deploying technology that can accomplish in minutes what once took hours, then trying to bill for it by the hour.”
Corporate legal teams increasingly expect firms to reflect efficiency in pricing and delivery. And, as the report reiterates, if a downturn forces clients to squeeze their budgets or sends another wave of top legal talent from firms to in-house departments, the resulting transformation could be even more dramatic than the Great Recession.
According to the report’s analysis,“ Corporate legal departments armed with both Big Law expertise and AI capabilities wouldn’t just negotiate harder on rates, they might stop needing outside firms for entire categories of work.”
What this means for you:
- Raising rates is a short-term tactic, not a strategy. It needs a value narrative. Without that, procurement will flatten you.
- Firms that align pricing with AI-enabled delivery will have a defensible advantage as demand normalizes.
How to respond:
- Pilot one alternative model per quarter: phased fixed fees with clear deliverables, subscriptions for “legal ops + advisory,” or outcome-based components for repeat litigation. Keep pilots small, publish lessons, expand what works.
- Pair pricing changes with delivery transparency: show workflow, tools, and checkpoints that reduce risk and rework. When clients see process, they accept structure.
- Don’t bury AI. If a brief is faster and better because you used vetted tools plus senior review, say so—and explain how that reduces their total cost of risk.
4. Buyer Sentiment is Cooling Fast
In perhaps the most dire warning, the report shows that “net spend anticipation” is sliding toward pandemic-era lows. Legal need isn’t disappearing, but budgets are tightening. Overall, regulatory and counter-cyclical practices are holding up while transactional optimism is fading in several sectors.
According to the report, forecasts point to demand softening in mid-2026, with the potential for contraction.
What this means:
- Expect more selective panels, tougher rate negotiations, and heightened scrutiny on value per dollar.
- Funding will go to matters tied clearly to business outcomes; nice-to-have advisory is a tougher sell.
How to respond:
- Move from “capabilities” to “impact” marketing. Replace generic practice descriptions with stories that tie legal work to measurable outcomes (time-to-close, avoided penalties, revenue protection).
- Build reusable client assets such as templates, decision trees, checklists and playbooks. Offer them as part of engagements.
- Segment clients by budget pressure and sector outlook. For example, adjust scope, staffing, and pricing for a recession-exposed retailer versus a resilient health system.
5. History Lesson: Beware the Peak-Before-the-Fall Pattern
Those who rode out the dot.com bust and the Great Recession might be feeling a little deja vu.
“Today’s legal market dynamics — characterized by booming demand amid instability, runaway expenses, and universal optimism — closely mirror the conditions that preceded previous industry downturns,” says the report. The legal market appears to be repeating its pattern of surging just before a significant correction.
Of course, today’s lift may look different — after all, everything about 2025 was “unprecedented,” and 2026 is off to a tumultuous start. But the warning signs are familiar: rapid rate growth, rising expenses, and client migration, along with the unsteadying uptick in acquisitions. And when conditions change, firms that assumed altitude equals safety will feel the drop most.
What this means for you:
- The real risk isn’t a demand cliff; it’s a profitability squeeze if rates stall while your costs stay high.
- Firms that have flexible delivery models and clear value communication are most likely to keep clients, even in a contraction.
How to respond:
- Protect margins now. Map each major practice’s cost-to-serve. Where are you overlawyering? Where does partner review add little? Tighten staffing before clients force you to.
- Assume your jitters are justified and create an “unstable economy playbook” that includes priority matters, pricing guardrails, AI-enabled workflows, ALSP partnerships, and client communication plans.
- Strengthen client trust. Investing in quarterly business reviews, shared KPIs, and upfront scoping beats battling over end-of-matter discounts.
The Path Forward?
Bottom line: The past year’s profits are real, but not a promise.
“The law firms that will define the next era of legal services will be determined not by how much they invest in technology and talent,” posits Ranathun, “but by how boldly they reimagine their entire operating model.”
Winners, he says, won’t necessarily be determined by size or legacy, but they’ll be the firms that act decisively now.
Treat the current elevation as an invitation to act, not to relax and admire the view.
Use today’s gains to harden foundations: pricing that reflects how work is done, technology that demonstrably improves outcomes, delivery models that flex with demand, and client narratives that speak to business impact.
Pick one practice to pilot better pricing, one workflow to make measurably faster with AI, and one client for a quarterly review centered on outcomes. Repeat.
When the ground shifts—as it always does—you’ll be standing on solid ground.
The 2026 Report on the State of the US Legal Market: Peak Prosperity and the Fault Lines Below
Read the full report and recommendations from the Thomson Reuters Institute in cooperation with Georgetown University Law Center’s Center on Ethics and the Legal Profession.
Image © iStockPhoto.com.
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