Master Chief is probably disconfirmed(I say probably, due to the usual trolling the company owner likes to do). This seems more likely as a way to conclude it, since we can't tell until it happens.
Cuphead is straight out disconfirmed. He's nowhere near possible.
Realistically, Steve does have the most advantages of being the strongest right now. He's the most iconic while not being disconfirmed(he's otherwise equivalent to Master Chief). Then it'd be Banjo & Kazooie due to heavy fan demand, and Phil Spencer making it clear he'd have no issue with it. Lastly is Master Chief, due to his apparent disconfirmation. All the other MIcrosoft characters beyond that(bar Cuphead who is not coming in this Fighter's Pass, as straight out said by the developers, who don't have a history of trolling nor a very weirdly done tweet that is similar to a ****post). So ones like Jade, Fulgore, Jago, Battletoads, Conker, Joanna Dark, Marcus Fenix, etc(might not be any other notable ones, maybe?). are in the same boat. All in "4th possible option". They aren't impossible, but don't exactly have anything special going for them at this time realistically. They lack the same amount of fan requests or iconic nature that the first 3 have by far.
So basically;
1. Steve
2. Banjo & Kazooie
3. Master Chief
4. Everybody else of reasonable note
5/Not happening: Cuphead, as directly said by the developers(as they outright said they have not been in talks about Smash. Hard disconfirmation for this Fighter's Pass. Regardless, Steve and Banjo & Kazooie currently top the charts if Master Chief is removed due to the apparent disconfirmation. They're MIcrosoft's biggest guns right now as well as respectfully very iconic. Steve is moreso than Banjo, but that doesn't inherently mean much when fan demand is also a factor. The one being heavily promoted does seem more likely, though). Master Chief can definitely appear in this category too.
6. Actually impossible at any point, like James Bond. Any other game character Microsoft owns that was not mentioned falls under 4 or 5.