Can Microsoft see all Windows notifications?

If applications use WNS (a lot do I believe), then yes:

learn.microsoft.com

Windows Push Notification Services (WNS) overview - Windows apps

The Windows Push Notification Services (WNS) enables third-party developers to send toast, tile, badge, and raw updates from their own cloud service. This provides a mechanism to deliver new updates to your users in a power-efficient and dependable...

For local notifications (“created on your machine”), I don’t think so, however this is just speculation. They are however stored in a local SQLite database (wpndatabase.db) in this folder: %LOCALAPPDATA%\Microsoft\Windows\Notifications\.

If you have OneDrive configured to sync AppData (not sure if this is even possible) or Phone Link (or any other Cross-Device sync) enabled they might be stored on Microsoft servers.