It depends on what MS and it's customers demand and expect. MS being a PC company for much longer than a console company, who's been trying to bridge the gap for quite some time now, very well doesn't or won't care as much as the gen goes on if the Series S games are far inferior to the Series X. As long as the games play well enough and aren't terribly broken and glitched, if you want better graphics and smoother framerates, find a way to upgrade to the higher tier X model.
There's also the possibility that as time goes on, if Series S continues to sell better, especially if the gap widens in it's favor, MS very well may ask devs to shift some effort from Series X to Series S. You wouldn't want to take too much away from your top tier X model, but if you've clearly got a much larger audience playing on the lower tier S model, it wouldn't be crazy to see MS ask to take a bit of the polish time away from X version games and use that time to improve S version games a bit.
The XB console space can work a lot like the PC space as you've mentioned, as long as the consoles remain much simpler to operate vs PC's. Offering a few different console game modes like performance vs resolution is about as far as it needs to go. As long as the lowest tier present gen console experience is just good enough, casual console gamers will accept it as long as the price is right. Some of them are even accepting it on last gens XB One right now, so present gens Series S would probably seem like a worthy upgrade to some of those casual gamers.
I don't see it continuing to sell better as time goes on cause I think most console gamers won't want to play versions of games like GTA 6 and Witcher 4 that run poorly. With stock getting increasingly normalized now I see Series S making up a smaller and smaller share of Xbox Series sales as this gen goes on.