Q1 2026: Strong demand and rate hikes are being absorbed by rising expenses

Thomson Reuters Institute's Q1 2026 Law Firm Financial Index, covering 195 large and mid-sized U.S. firms, shows demand up 2.7% year-over-year — an unusually strong increase for a first quarter. M&A demand rose 4.4%, litigation 2.9% and corporate work 2.9%. However, direct expenses grew 8.1% and overhead expenses 8.3%, driven in material part by AI and technology investment. The combination means that rate and demand strength is not flowing through to proportionate profitability gains, and firms that are investing heavily in technology are incurring costs now that they expect to recover through efficiency and pricing power later.