Is the S&P 500 too expensive? My annuity game plan
By The 11ish Collective · October 3, 2026
I don’t own an S&P 500 fund. Not because I think America is done, but because I think the price is too high. The S&P 500 trades at about 26 times the last 12 months of earnings, and my gut has always said that anything over 25 eventually turns around.
So I checked my gut against history. Then I looked at what I actually own instead, including a bunch of indexed annuities tied to the S&P 500 and the Nasdaq 100, and asked one practical question: should I take the penalty-free withdrawal every year, or leave it alone?
How expensive is the S&P 500 right now?
| Measure (September 2026) | Reading | For context |
|---|---|---|
| S&P 500, trailing P/E | 25.9 | The long-run average is around 16 |
| S&P 500, forward P/E | 24.5 | Based on next year’s expected earnings |
| Shiller CAPE (10 years of earnings, inflation-adjusted) | 40.6 | Only the 1999–2000 peak was higher, at about 44 |
| Nasdaq 100, trailing P/E | 29.7 | Even more of its value is profits years from now |
By any of these, US stocks are expensive. That part of my gut is right.
Does a P/E over 25 mean the market turns?
Here’s every stretch where the S&P 500’s trailing P/E went over 25, and what happened next:
| When | What happened next | Did “over 25” call it? |
|---|---|---|
| 1999–2000 | The S&P fell about 49% by 2002, and it took over a decade to get back to even | Yes |
| 2009 | Earnings had collapsed, so the P/E spiked AT the bottom. A 10-year bull market followed | No, the opposite |
| 2020–2021 | Down about 25% in 2022, then new highs within about 18 months | Sort of |
| 2024–2026 | Stayed above 25 and kept climbing | Not yet |
That’s one clean hit out of four. So no, a high P/E doesn’t tell you WHEN. What it does tell you is what the next 10 years probably look like: historically, when the Shiller CAPE starts this high, the following decade’s returns after inflation have been low. High P/E is a bad timer and a decent long-range forecaster.
Poker version: a high P/E tells you the pot odds are bad. It doesn’t tell you which card comes on the river.
One more thing I had to admit to myself. Most of that premium sits in the biggest tech names at the top of the index. The rest of the S&P 500 isn’t nearly as stretched. So when I say “the US is expensive,” what I really mean is “Nvidia and Microsoft are expensive.”
What I own instead
1. Three country funds outside the US
I hold Singapore, Germany and Japan funds. When I actually opened each one up, none of them was the bet I thought it was:
| Fund | What it really is | 2026 so far | P/E |
|---|---|---|---|
| iShares MSCI Singapore (NYSE Arca: EWS) | About half of it is 3 banks: DBS, OCBC and UOB. It’s a bet on interest rates staying high, more than a bet on Singapore. | +22% (to Oct 1) | 19.6 |
| WisdomTree Japan Hedged Equity (NYSE Arca: DXJ) | Japanese exporters, with the yen hedged out. It wins when the yen is weak, twice: once through the companies and once through the hedge. | +27% (to Aug) | n/a |
| iShares MSCI Germany (NYSE Arca: EWG) | Industrials, insurers and SAP. Germany imports most of its energy, so expensive oil hurts it. | Roughly flat | 18.2 |
Notice the P/Es. They’re cheaper than the S&P 500, but they’re not cheap. They’re about where the non-tech part of the S&P sits.
Also notice Japan. The story I told myself was “Japan’s government is investing heavily in its own stock market.” Half true. The Bank of Japan WAS the biggest buyer of Japanese stocks for over a decade, but it stopped buying in March 2024 and is now a slow seller. What’s actually pushing Japan up is companies: after the Tokyo Stock Exchange told businesses trading below book value to fix it, buybacks hit a record ¥22.3 trillion in fiscal 2025. Plus regular people putting savings into stocks through Japan’s tax-free NISA accounts. So it’s corporate Japan and households, not the government. Arguably healthier, but there’s no backstop if shit hits the fan.
And Germany is the one losing right now, which is exactly why I keep it. Oil is above $100 and rates are going up, and most of what I own wins in that world (I sorted all of it in this post on stocks and inflation). Germany is the one position that pays if I’m wrong about that. You don’t fold your hedge just because it’s losing.
2. Indexed annuities tied to the S&P 500 and Nasdaq 100
Here’s the funny part. I said I don’t own the S&P 500, but I kind of do. An indexed annuity credits you based on how an index does, with a floor and a cap:
- Market drops 20% in a year: a fixed indexed annuity with a 0% floor credits you 0%. You lose nothing. (A buffered annuity, called a RILA, absorbs the first 10% or 20% of the loss and you eat the rest.)
- Market rises 25%: if your cap is 9%, you get 9%. The insurer keeps the rest.
That’s the right tool for my exact view. “Too expensive to own outright, but it could keep running for years” is the setup where you want US exposure that can’t take the big hit, and you’re willing to give up the monster years to get it. And since I think rates are going up, there’s a bonus: insurers can offer better caps when rates are higher.
Should you take the penalty-free withdrawal every year?
Most annuities let you pull out about 10% a year without a surrender charge. I was going to do it every year on autopilot. My answer now: leave it in by default, and only take it when there’s a reason.
The reason is simple. If you think stocks are expensive, the annuity is the protected part of your stock exposure. Pulling money out of it every year to buy stocks moves you from the part with a floor to the part without one. That’s the opposite of what the P/E argument says to do.
Also, “penalty-free” only means the insurer won’t charge you. It doesn’t mean free:
| Hidden cost | How it gets you |
|---|---|
| Taxes | In a non-qualified annuity (bought with after-tax money), gains come out first and are taxed as ordinary income. If you’re under 59½, the IRS adds a 10% penalty on the gain. In an IRA annuity, the whole withdrawal is a taxable distribution unless it goes to another IRA. |
| Lost index credit | Many indexed annuities credit once a year on the anniversary. Pull money out before that date and that money can miss the year’s credit. If you take it, take it right AFTER the anniversary. |
| Riders | If you have an income rider or an enhanced death benefit, a withdrawal can shrink the benefit by more than the dollars you took out. Read this part of the contract first. |
| Bonus recapture | Annuities that came with a sign-up bonus sometimes take part of it back on withdrawals. |
Here are the four reasons I’d actually take it:
- If you have too much with one insurer. An annuity’s guarantee is only as good as the company behind it. If an insurer fails, California’s guaranty association covers 80% of an annuity’s value, up to $250,000, and $300,000 per person across all of that insurer’s policies. Other states have their own limits. If you’re over that with one company, a partial 1035 exchange can move money to a different insurer with no tax and no surrender charge. The catch: don’t withdraw from either contract for 180 days after, and not every insurer allows it.
- If your cap gets bad at renewal. A low cap means you’re paying for a floor and getting very little upside. Move it, ideally by 1035 exchange, not by cashing out.
- If you need cash. The penalty-free amount is usually your cheapest money, cheaper than selling something with a big gain.
- If the market actually crashes. If the S&P falls 25 to 30% and prices are fair again, that’s when pulling money out of the protected bucket to buy stocks makes sense. That’s using the P/E argument, instead of just talking about it.
My game plan, and what would change it
| Position | What I’m doing | What would change my mind |
|---|---|---|
| No S&P 500 fund | Staying out | A real drop. If I want more US later, an equal-weight S&P 500 fund fits my P/E argument better, since it doesn’t lean on the expensive giants. |
| Singapore | Holding, not adding | The Fed starting a run of rate cuts. That squeezes the banks it’s built on. |
| Japan (hedged) | Holding, not adding after a big year | The yen getting much stronger while Japanese stocks fall. That hits the exporters and the hedge at the same time. |
| Germany | Keeping it as my hedge | Oil staying above $100 into winter would make me cut it. Oil dropping back under $85 would make me add. |
| Annuities | Leaving the penalty-free amount in | Any of the four reasons above |
Common questions
Does a P/E over 25 mean the stock market is about to crash?
No. It’s happened four times and called a crash cleanly once (2000). In 2009 the P/E spiked AT the bottom because earnings collapsed. A high P/E tells you the next 10 years will probably be weaker than average. It doesn’t tell you when anything happens.
Are stocks outside the US cheaper?
Cheaper than the S&P 500, but not cheap. Singapore and Germany funds trade around 18 to 20 times earnings, about where the non-tech part of the S&P sits. What makes the S&P look so expensive is mostly its biggest tech names.
Is Japan’s government propping up its stock market?
It used to. The Bank of Japan bought stock funds for over a decade, then stopped in March 2024 and is now selling slowly. Today the push comes from companies (record buybacks after the Tokyo Stock Exchange pushed them to fix low valuations) and from households buying through tax-free NISA accounts.
Are annuities insured?
Not by the FDIC, and not by the government. But they’re not uninsured either. Every state has a life and health insurance guaranty association that pays policyholders, up to a limit, if an insurer fails. It’s funded by charges on the other insurers licensed in that state, not by taxpayers. The limit that applies is your state’s, based on where you live, not where the insurer is.
How much of my annuity is protected if the insurer fails?
In California, 80% of the annuity’s value, up to $250,000, and $300,000 per person across everything you have with that one insurer. Two things people miss. First, it’s 80%, so even a $200,000 annuity is only covered for $160,000. Second, the limit is per insurer, so $1 million spread across four companies is a very different risk from $1 million at one.
What actually happens when an annuity company fails?
Usually a freeze, not a wipeout. When Greg Lindberg’s North Carolina insurers went into rehabilitation in June 2019, annuity withdrawals were largely frozen for anyone under 95 without a hardship, and the plan allowed up to 10 years to sort it out. Your money may come back, but you can’t touch it while it does. That’s the real risk: time, not just dollars.
Should I take the penalty-free withdrawal every year?
Not on autopilot. If you think stocks are expensive, the annuity is your protected stock exposure, and pulling it out to buy stocks moves money from the part with a floor to the part without one. Take it if you need the cash, if your cap gets bad at renewal, if the market has actually crashed, or if you have too much with one insurer.
If I have $1 million in annuities, should I withdraw the max every year?
Depends on how many insurers it’s with, not the total. If it’s four insurers at $250,000 each, leave it alone. If it’s $1 million at one insurer, most of it sits above the guaranty limit, so yes, move some every year. But move it, don’t cash it out. Withdrawing gets taxed, and if you’re under 59½ the IRS adds a 10% penalty on the gain.
What’s a partial 1035 exchange?
A direct transfer of part of one annuity into a new annuity, often with a different insurer, with no tax. Use the penalty-free amount and there’s usually no surrender charge either. The catch: don’t take money out of either contract for 180 days after the transfer, and not every insurer allows partial exchanges. If your surrender period ends soon, it can be easier to wait and split the whole thing across insurers then.
When’s the best time to take a withdrawal?
Right after your contract’s anniversary. Many indexed annuities credit once a year, so money pulled out before that date can miss the year’s credit.
If you want to check your own
If you own annuities, pull the statements and write down four things for each one: fixed indexed or buffered, IRA or not, any riders, and which insurer. Then add up how much sits with each insurer. That one number tells you more about your real risk than the P/E of anything. And if you think I’ve got any of this wrong, tell me. I’d love to be proven wrong.
Expensive markets don’t scare me anymore. I can’t control when the market turns. I can control what I own when it does.
Disclosure: Steve holds EWS, EWG and DXJ, and indexed annuities linked to the S&P 500 and the Nasdaq 100, as of October 3, 2026. He does not hold an S&P 500 fund or an equal-weight S&P 500 fund. No payment was received for this post. This is commentary, not investment or tax advice. Annuity rules vary by contract and state, so read yours or ask the insurer.
Sources: S&P 500 and Nasdaq 100 P/E ratios from GuruFocus (S&P 500) and GuruFocus (Nasdaq 100), September 2026; Shiller CAPE from MacroRadar, September 2026; CAPE and long-run returns from Current Market Valuation. Fund holdings, returns and P/Es from StockAnalysis (EWS), iShares (EWG) and US News (DXJ). Japan buybacks from Nikkei Asia; Bank of Japan ETF sales from Sumitomo Mitsui DS Asset Management. California guaranty limits from the CLHIGA notice. Partial 1035 exchanges: IRS Rev. Proc. 2011-38. Lindberg insurers’ rehabilitation and annuity freeze: North Carolina Department of Insurance and WRAL.
Featured photo by Tyler Prahm on Unsplash.
Written by Steve. Edited by Steve.
