You stated that "you know it wouldn't work", yet only provided unsubstantiated assumptions of reasons why you believe it wouldn't work. When I look at your listed reasoning, I see arguments of what is possible, being conflated with arguments of what is probable. I'll explain what I mean.
Your point of upsetting customers just doesn't resonate in any capacity for me. You believe Series X customers would "feel like crap" if MS decides to replace their console after 6 years on the market? I really don't understand why you would even include this as I just don't see it being the case for 98% of their customers. Especially considering the trend for extended cross gen periods and the console market has been conditioned to expect 7 year generations.
You say there is "no way MS can build a compelling machine in 2026", yet this is just you guessing. I can just as easily assert MS can build a compelling machine by 2026, and since we have exactly zero insight into the goings on of their R&D division, our assertions stand on equal footing.
You are assuming we will see the PS5 at $350, which is possible so let's go with that. If it is a compelling product, the price of the PS5 will have little impact. In 2026 you would be comparing the price of a last gen machine with a next gen machine, these are different target markets that are not mutually exclusive. The success of a inexpensive last gen machine does not inhibit the success of a compelling next generation machine.