Can horror games take place in stylized world?

Yes, they can. Why would they not? Bendy and the Ink Machine comes to my mind. Hello Neighbor too.

Of course, horror can be a broad term, so it depends which kind of horror you want. Many horror games these days are just jumpscare sequences. Good psychological horror (think "The Shining" movie, or even "It") seems hard to achieve, so many devs go to the easy route of jumpscares. It's not a bad thing per se, just overused and shallow.

A "cute" non realistic art style can also be used as a tool in a horror game, because you don't really expect such cute characters and sceneries to be so dark. It can be use to creat a great contrast to the theme of the game.!