(Reuters) -Large and midsized U.S. law firms enjoyed a "sharp spike" in client demand during the third quarter, setting the stage for a profitable 2025, according to a new analysis of firm financial data.

Overall demand was up 3.9% from the third quarter of 2024-the fourth-highest quarterly increase of the past 20 years and the highest outside of 2021's rapid post-pandemic rebound, according to the Thomson Reuters Institute's latest Law Firm Financial Index, released on Monday. The Thomson Reuters Institute and Reuters share the same parent company.

Transactional practices fueled much of the third-quarter demand surge, especially among midsized law firms, which saw transactional demand climb 6.1% over the previous year. Across firms, mergers and acquisitions demand was up 6.7% over the third quarter of 2024, while all corporate work was up 4.4%, real estate was up 4.2%, and tax was up 3.7%.

Transactional practices were "intensely busy across all segments," the report found. Litigation demand was up 4.9% over the previous year, while labor and employment was up 4% and bankruptcy was down 0.4%.

Combined demand for countercyclical practices, which include litigation and bankruptcy, was up just 1.6% year-over-year among the 100 U.S. firms ranked highest in revenue by the American Lawyer. Among those ranked 101-200, demand for countercyclical practices was up 6.3%. 

Midsized law firms saw a 3.9% increase in demand for countercyclical practices in the third quarter.

"The dynamic we've been seeing is that corporate clients especially are looking to control their budgets when it comes to legal matters, and a huge way they've found to do that is to move some matters from more expensive firms to less expensive firms," said Bryce Engelland, a senior industry data analyst with the Thomson Reuters Institute.

The index compiles financial quarterly metrics from 195 large and midsized U.S. law firms on key factors such as demand, productivity, billing rates and expenses. In addition to higher demand, billing rates were up 7.4% over the third quarter of 2024, bolstering law firm profitability.

It remains unclear whether the good times for law firms will extend into 2026, the report warned. Investments in technology helped push law firms' overhead expenses up 7.5% in the third quarter, and demand for legal services can decline as quickly as it grows, it said.

"The global economic and geopolitical landscape remains deeply unstable, and there's little indication that conditions will improve anytime soon," the report said. "While firms are eagerly capturing as much of the upside activity as they can, the downside risk still looms large."

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