literally why not? Are you referring to Microsoft first party games? Of course they won't because they have the most experience with it. Worst case they upscale from 900p or something with FSR 2.0 or some other technology.They are not going to release games that can only do 720p on the Series S.
But a third party? They can put it out at 720p if they have to. There is NOTHING preventing them from doing that. It is up to the XSS owner whether that is acceptable or not.