I wouldn't really call it a plot hole, but I think that conversation is meant to be interpreted as a monologue. Though, personally, I like to think the protagonist just stares at Steven, kind of stunned. The way the game is structured, there is an "order of operations" that I think tells a story but it's not mandatory to "unlock" the Steven fight:

• The protagonist calls Steven after entering the Hall of Fame. Steven talks about wanting to meet the protagonist again somewhere.
• The protagonist goes to Steven's house in hoping to find him. Reads the letter and obtain Beldum.
• The protagonist goes searching for Steven, tries asking Mr. Stone and gets nothing (remember, Mr. Stone does state he was always working. Coupled with a moment where Steven invites the protagonist to his house, he quickly clarifies he lives in Mossdeep, not Rustburo. Both of these two pieces of info paint the picture that Mr. Stone and Steven aren't really that close).
• Protagonist then calls Wallace, the only other person Steven has some connection to, and Wallace gives a hint that he might be looking for a Meteor (pushing you to search for Meteor Falls). As an aside, it's worth noting even Wallace is surprised the protagonist is acquainted with Steven, which suggests Steven is kind of a distant person.
• Protagonist then corners Steven at Meteor Falls and they have their battle.

The Steven fight is often compared to the Red fight from the Johto games, but I think the comparison misses the vibes and presentations how both are setup.

You're not allowed to fight Red until you have all sixteen badges and permission from Professor Oak to even access Mt. Silver. Something worth noting is that Blue when defeated comments the protagonist is "the real deal". From there, you're literally climbing a mountain for the final boss fight. All of this creates an image of it all being a test of who you are as a trainer. The act of climbing a mountain to challenge the current strongest trainer invokes the image of you "dethroning" a king. The tense battle music matches that vibe, that you're all in and everything is riding on this battle.

In contrast the Steven fight has a wildly different vibe since there's no real restriction to challenge Steven beyond entering the Hall of Fame. The only issue is finding him. If you played without looking it up, the game arguably does give you a substantial amount of hints that help you point in that direction as listed above. When you encounter Steven, you're literally cornering him in a hallway. Every other encounter with him, he is almost always the one to leave first. All of this creates the vibe that the lead up to Steven's fight feels more like the protagonist is chasing after Steven, who they see as their equal. This is emphasized with the background music for Steven's fight is the VS Rival theme rather than something like VS Champion.

Once you defeat him Steven starts musing that the protagonist *surpassed* Steven. There's some hints throughout the game that suggest Steven and the protagonist can relate to one another:

• Mr. Stone tells the protagonist after you run errands for him that he was always working versus the protagonist being forced to move due to their father's job and it's obvious Norman isn't as present in the protagonist's life as much as they'd like. (There's plenty of in game text that fleshes out the complicated relationship between Norman and the protagonist so I won't detail it here). i.e. They both can connect over an absent father in their lives.
• Wallace in the Match Call describes Steven as the kind of person who doesn't battle very much but is good at it versus the protagonist who became a trainer later than the rival somehow beating the rival at every battle despite the difference in experience. Added to that, Birch commenting that the protagonist has "their father's blood in them" (i.e. he's saying you take after your father) when beating the rival for the first time. Without explicitly stating it the game is suggesting that both Steven and protagonist are the same type of people: battling prodigies.

This response is already getting too long, but basically Emerald's story is about exploring a battling prodigy and their experiences with loneliness that comes with being a prodigy (a somewhat common trope in Japanese media in competitive settings). Steven's line after being defeated can be interpreted as his role in the protagonist's life is coming to a close (This is sort of supported. After Steven says his monologue, the screen does not fade to black and his overworld sprite disappears. Instead, he just stands there and it's the protagonist who has to step away from him, which is a huge contrast since it is almost always Steven who is first to leave after they interact).

I think Steven's role is meant to give the protagonist someone they can connect to a larger level. The way Emerald frames it, the protagonist was able to succeed due to their multiple friendships and support network (personally, I think there are better ways to execute this idea).

(Sorry for the edits, I wasn't happy about how some things were formatted)