It's a hard question to answer.
First, the key details I read are the words: “Microsoft grants you a personal, no-exclusive, non-sublicensable, transferrable, revocable, limited license … strictly for your personal, noncommercial (except as specifically provided below) use.” I've bolded four terms.
Personal use is mentioned twice. Distributing it on steam is not personal use. Commercial doesn't mean “can't make money”, although that's a frequent interpretation. Commercial use means something very broad, both direct and indirect use for any kind of commerce. Free stuff can absolutely be part of a commercial use. Even putting something up on your own website can qualify as commercial use. I have a difficult time seeing a project distributed on Steam ever being interpreted as personal use.
Also, it's not sub-licensable. The talk later in the license about that you cannot enter into an exclusive agreement with someone else to distribute your item, even if they don't pay you. They go into some nuanced details about what it means, and whether your agreement with Valve violates the sub-license terms would depend on details we don't have. It's not something I'd approach lightly.
Further, I note the license is revocable. They can tell you “no” specifically if they choose. If they decide they don't like your usage for any reason, they can terminate their license quickly and easily. Sometimes fan projects start out fine, but over time the brand team decides they want to shift the direction of the brand and it becomes too close to an existing fan project for corporate comfort. In that case they change their quiet silence into discussions and takedowns.
The next thing is that all these actions take time, effort, and/or money. Someone needs to notice it, and they need to talk with the legal department, and they need to send messages to another company, and they need to trigger a shutdown. The harsh reality is your project will probably die in obscurity before that happens.
The answer to can you do it, is probably yes, you can start down the path without too much worry from Microsoft. If you succeed at creating a fan project, you also probably can get it up on Steam and on your personal project web page.
A different question is if the project will ever be shut down. The license describes right at the top that is only good as long as the work remains in Microsoft's good graces. If it is tiny and they never notice, no issues. If it gets big then there may be issues from the company. The company may review it, decide they're okay with it, and leave it alone. I've worked on several projects where the dev team has quietly supported fan works, but officially we never grant any additional license. They also may review it, decide they're not okay with it, and take action. Even more, if your project becomes wildly successful, they have the option to change their mind at any time, one day it's a small project they ignore, the next day they consider it something requiring a commercial license. Valve also may be uncomfortable with it on review, and require you to show evidence of a proper license or take the site down.
The only way to be certain is to not use their stuff, create your own stuff, and work with lawyers to properly license anything that you didn't create. This is a creative industry, after all. If you create your own stuff you aren't beholden to their licenses, nor are you riding on their coattails but on your own merits. Create something new.
