Correct, as of the current firmware, not a hardware issue, the PS5 is incapable of outputting at 4K 120Hz 10-12bit 4:4:4.
To get 12-bit at 4:4:4, the bandwidth will be 48Gbps. So 12Gbps per lane. FRL 6 (FRL = Fixed Rate Link)
To get 10-bit 4:4:4. the bandwidth will be 40Gbps. So 10Gbps per lane. FRL 5.
To get 12-bit 4:2:2 which the PS5 does, the bandwidth will be 32Gbps. So 8Gbps per lane. FRL 4.
However, since the PS5 is using the limited version of the HDMI 2.1 chip which is limited to 40Gbps, the PS5 will need to change from outputting at 12-bit to 10-bit if they want to get 4:4:4 chroma. So 4K 120Hz 10-bit 4:4:4.
In the process of building a next gen console with next gen HDMI 2.1, there was no certified by HDMI forum cables around. As you can see, a lot of those cables were some weird China named cables which proclaim that it is able to do the full 48Gbps. But without any HDMI 2.1 device to test it out with, nobody can verify that.
HDMI 2.1 was completed as early as back in 2018 as well. It's just that, it takes a while for companies to actually adopt new tech since HDMI 2.1 is a way bigger upgrade than say HDMI 1.4 to HDMI 2.0. The bandwidth jump is massive. And along with it, a lot of new features too like ALLM, VRR, eARC.
Some of these HDMI 2.1 features were then backported to HDMI 2.0b devices as long as the cables have with Ethernet on it where they can leverage those HDMI 2.1 features.
Currently, to prevent customer complains when they can't get HDMI 2.1 working properly like with a poor quality HDMI 2.1 cable, and with the cables that they use not being certified by HDMI Forum since it is still too new, Sony has no choice but to limit the bandwitdh to just 32Gbps until they are sure things can work out well before enabling the full bandwidth along with enabling other features such as VRR and ALLM which is built into HDMI 2.1 as a normal feature.
Xbox took a different approach with instead, giving you a Video Output information that shares a lot about what your cable or TV can and cannot do. That is a better approach in allowing customers to see if they need to upgrade their cable or TV to get the full HDMI 2.1 experience.
Playstation is playing it safe. Thus, we get this hard limit. And based on TechnoDad's latest video, Sony is right to do it. Because the cable bundled with the PS5 sometimes fail 3 times out of the 10 times that he ran the cable test with. Imagine the amount of bad press they will get when some people complain they can't get to take advantage of HDMI 2.1 while others can. So to play it safe, use some weird bandwidth number such as 32Gbps to ensure that its cables can run in most of the TVs out there before enabling the full bandwidth and the features.
You can watch the many HDMI cable including Xbox and PS5 OEM cables test in this video.
https://www.youtube.com/watch?v=x0kcsFXGPUg
Do you have a CX or C9? If on the CX, just press the green button at the bottom of your remote many times. You will get a special diagnostic display that tells you what the PS5 is outputting at.
You can refer to HDTVTest's video. His showing of the HDMI diagnostic menu is the same as mine which you can see on the 6m49s mark. Plus, he tests several cables here too.