If a tenant was created before August 1, 2017, modern authentication is turned off by default for Exchange Online. So when M365 Security Defaults is enabled Outlook will continue to try and use legacy authentication.

Enable modern authentication for Outlook in Exchange Online with Power Shell as per:
https://docs.microsoft.com/en-us/exchange/clients-and-mobile-in-exchange-online/enable-or-disable-modern-authentication-in-exchange-online

Can also do this registry addition on the client:
https://support.microsoft.com/en-us/help/3126599/outlook-prompts-for-password-when-modern-authentication-is-enabled