Who expected ARMS to sell crazy numbers? It looked like a pretty niche idea from the beginning. And like another user mentioned; the pedigree or size of a studio does in no way indicate expectations of sales, especially if the budget is small (ARMS was not an expensive production and thus not a huge investment). With titles sporting more bloated budgets, higher sales expectations should follow. It should also be noted that ARMS reviewed well below EPD's greatest games.
First Party software needs to distinguish itself from Third Party software. The purpose of Third Party software is to turn a good profit for the publisher. The purpose of First Party software is to sell hardware. The best profits for a console maker comes from royalties on Third Party software. In order to achieve this, they need to get a large console base, and that comes from compelling First Party software.
That's why ARMS really should not have a sequel. It didn't move hardware. The same team could have made a 2D Mario or Wii Sports Resort sequel. Neither of these games has a huge budget and yet they both move hardware. Or if they want a new successful IP, then they should scrap ARMS and try something completely new. ARMS is not moving hardware and that is why it isn't worth it for them to make a sequel.