Unfortunately, by that logic you could conclude that competing with Microsoft at all would be out of question because in theory they could sue you into oblivion with a completely arbitrary lawsuit.

The real world isn't quite that bad, so OP is correct to observe that Microsoft does not in fact have a trademark on Copilot, they have a pending trademark on Microsoft Copilot and GitHub Copilot. Given that their own trademarks (owned by different subsidiaries) include a second word to qualify them and would pose a substantial risk of confusion with each other if Copilot alone were treated as the mark, I think it's reasonable to argue that Microsoft couldn't claim a trademark on Copilot, unqualified, and is unlikely to even try to assert it.