yes it can run things that don't use much of the API surface (just using libc? probably fine) however try running a game from the Windows 95/98 days and you've got a maybe 50/50 chance of it working e.g. they changed the return code from BitBlt from 95/98 -> XP, they used to return the number of scanlines but switched it to a boolean same with the heap management functions, directory traversal functions, etc
Those issues only apply to Windows 9x linage. Current Windows versions trace back to Windows NT 3.51/2000 linage. Naturally 9X => XP don't work flawlessly, they are two different OS stacks.
however it sort of undermines the "insane compatibility" / "stable API" point if mass-market Windows software produced before the 2001 release of XP mostly doesn't work on modern Windows
NT effectively forked Win32 (introduced with Windows 3.1) into something incompatible
(meanwhile it all runs on Wine perfectly fine)