Hello Justin,
Since you can successfully sign in to Outlook, the Microsoft account website and Microsoft Authenticator, the Microsoft account itself appears to be working correctly. The issue is more likely related to how Windows is trying to authenticate during the setup process rather than a problem with the account itself.
First, make sure the PC has a working Internet connection during setup. I would also verify that the selected keyboard layout matches your physical keyboard, as an incorrect layout can cause passwords and special characters to be entered differently than expected.
Because you mentioned that passkeys and verification codes are not working during setup, I would check the sign-in methods configured for the account at account.microsoft.com under Security settings. If available, try choosing a different sign-in method during Windows setup, such as Microsoft Authenticator approval instead of a passkey. It is also worth reviewing the account's recent sign-in activity to see whether the device's authentication attempts are being blocked or challenged. If this helps, please accept the answer.
Tracy Le