I like how this thread devolved into BG1 vs BG2 arguments because nobody can prove my thesis wrong
Alright, instead of more angry shitposting I will try to address some of your points based on personal experience with RPGs.
Both games offer a huge amount of freedom in character building, and allow you to fuck it up without artificially safeguarding you from bad choices.
It's not the case in Morrowind. You can always grind and "fix" your build at least to a high degree. The only two major choices at start are the race and the sign. So, you can still gimp your mage-type char by not choosing atronach/altmer for example but that's the extend of it. Level scaling which is suppose to punish you for your mistakes can only make your life harder so much an even become obsolete since 23lvl or so in theory but in practice it's barely matter at all. Especially since you can always raise and use "misc" skills and don't even care about level scaling. Also those two major choices at start are barely matter because the game is very easy in general. Moreover, it's true for Arcanum as well mostly thanks to possibility of raising attributes along the way but to a far lesser degree due to race limitations and mentioned in OP tech/magic aptitude. To summarize, there's much harsher RPGs in this regard nowadays and the prime examples are very well known around here: UnderRail and The Age of Decadence.
There hasn't been any RPG since Arcanum that has NPCs react to your character's race/attributes/sex so consistently as Arcanum. Nowhere else do your character creation choices make such a clear difference as in Arcanum.
There was an RPG which could easily challenge Arcanum in that regard but it was made by the same people and called Vampire: The Masquerade Bloodlines.
You can kill EVERY essential questgiver NPC
The Outer Worlds gives this opportunity as well. Does it make the game better? Hardly. In Arcanum, even if the ability to go full murder hobo was nice, the brilliance of this design manifested itself because the key characters were so well written and fleshed out. And the possibility of summoning their spirits and get your answers through torture was truly something else. Ironically, the other game in question, fails at this miserably. At least plot NPCs weren't immortal yet.
Nobody else has even attempted to go anywhere near Arcanum's quality in this aspect.
Arguably, UnderRail. I take it you haven't played it. As in Arcanum, most of quests are straightforward there but few are truly amazing and inherit that very design. More related to the set of skills since there's no races but more than just that. Unexpected reaction on having quest item already is there for certain, acknowledgement of the chosen sex is there as well.
And then there's the secrets. Arcanum has so much hidden content, that isn't impossible to find because there's enough hints for it, but it never holds your hand. Dialogue options that result from a high INT or CHA score aren't tagged as such! You have to realize that this is a smart thing to say by yourself!
This, to be honest, sounds pretty outdated. Even Pillars of Eternity (or was it only the sequel?) had the option to hide the tags already and what's more important, counting it as a clear advantage is controversial. It's a RPG we're talking about after all: how much do you want to hand over to the player himself and what to strictly tie to your char's progression system? As for hidden content, UnderRail once again. You'd be amazed to what extremes the devs went with that one (even involvement of random and ties to the highest difficulty aside).
The Imperial Cult questline even has some "oracle quests" where you are sent to retrieve artifacts, and their location is described to you in vague descriptions of the surrounding landscape. There are, of course, no quest markers for anything in this game. Only descriptions of how to get there: follow this road, take a right after the bridge, etc etc. You have to actually look at your surroundings to find your way, and the game allows you to get lost in the wilderness. Modern games don't allow you to get lost, they always put some markers into your interface to point the way. When I replayed Morrowind years after last playing it, it felt so incredibly refreshing to just be lost with only a vague idea on how to get where I wanted to be.
Guess which game comes to mind? Yes, UnderRail yet again. Even, I repeat, EVEN with the auto-map sometimes it's a real jorney just to get somewhere remote. But the game hasn't had the map on release and long time after while being huge. Reading through various complains about it was amusing as fuck back then. And some still consider that introducing auto-map made the game worse. Personally I would even tend to agree with them if expansion wouldn't be so damn big on its own.
Morrowind's equipment system is awesome, too, and apart from very few exceptions I can count on half a hand (Kingdom Come Deliverance, Neo Scavenger) no other RPG has ever implemented anything like it. Armor is split into different parts and can be layered with clothing. There are 16 individiual equipment slots in this game. 16.
Well, there was also Rage of Mages (1998!) which featured double-layered armor and it was beyond cool. It's also worth mentioning that in WoW there's 16 slots counting 2 weapon slots and not counting 2 optional cosmetic ones. I wonder if it was inspired by TES in any degree or not. But what's important is that in WoW and I'm sure other MMOs which was inspired by it that's matter while in Morrowind - not really. Due to difficulty issue. What's the point of gathering full daedric armor (even if it was indeed a cool journey on its own) and then enchant all of it?
As for the lore/immersion - highly subjective, I'd say we rather suffered from too many bland uninspired fantasy-like settings (essentially thanks to one thing: motherfucking DnD). And genre being half-dead in general. See also: TESO. Something tells me you haven't played Morrowind expansion despite it takes place guess where. And lastly, UnderRail has pretty fascinating lore and it takes some effort to actually reveal its details.