The TL;DR is that the organization that controls the HDMI standard won’t allow any open source implementation of HDMI 2.1.
So the hardware is fully capable of it, but they’ll get in trouble if them officially implement it.
Instead it’s officially HDMI 2 (which maxes out at 4k @ 60Hz), but through a technique called chroma sub-sampling they’ve been able to raise that up to 4k @ 120Hz.
However there are some minor reductions in picture quality because of this, and the whole thing would be much easier if the HDMI forum would be more consumer friendly.
In the meantime, the Steam Machine also has display port as a completely issue free display option.
Because the machine can’t render at higher than that probably
While the steam machine might not be able to run super demanding titles at 4k 120hz+, there’s no reason it couldn’t do that for lower demand titles like indie games or older games. The physical hardware is HDMI 2.1 capable and can use those higher resolutions/fps if the device is running windows, so this is entirely the HDMI Forum limiting the capabilities of the device because it’s an open source device.