We don't know. Valve has said they have no plans for a Steam Deck 2 any time soon, not until they can offer whatever they consider to be a substantial enough upgrade. It's possible ARM could be a means to that end, but we don't know. FEX probably needs to make a lot more progress before they can even consider it. Maybe it will by the time Deck 2 enters the conversation. We don't know.

Valve are doing the ARM experiment with the Steam Frame.

They mentioned not wanting to release a Steam Deck 2 until there was a significant performance upgrade available.

In my opinion an ARM chip with the FEX translation overhead isn't going to be it just yet, it will probably be another AMD SoC.

IMO: the steam deck is basically a Sony PlayStation 4 in a handheld format. If gamedevs would optimise their games, like they used to, we would not need a Steamdeck 2.

I mean, can't really tell while FEX has not been extensively tested, can we?

Valve has a great track record with (their contributuons too and use of) Wine, the devs are extremely competent and have been on this for ages, and Valve had any freedom to not choose an ARM chip, as low-power AMD alternatives became viable.

Can you go lower-power with ARM? Probably, but according to Valve it comes with a 10-20% performance hit for x86 Games at the moment. That means efficency takes a hit as well, whereas I would assume for 20% you are as efficient as an x86 chip at best.

My guess is that Valve isn't doing this to chase some efficiency, but for strategic reasons. They are growing independent from Microsoft, now they want to get independent from the oligopoly that is x86 as well. One thing we cannot forget in this discussion is that ARM is likely much cheaper to get, with much more vendors available, and custom designs being quite common.

Maybe we will see custom ARM hardware with FEX acceleration from/for Valve and suddenly the overhead is almost gone.

Not likely, but a lot of good reasons too.

Unless they can make Proton performance work emulating both the windows environment layer and a different CPU arch then I'd be very surprised to see this happen.