If I know that step 1 is correct for all the combinations (N) of its input (in test 1), in test 2, I only need to test the specific combinations (M) of step 2, treating step 1 as an axiom. So no need to have NxM in one test, or NxM tests.

Like if you were testing a drone stabilization software, testing the flying state can always assume that it has indeed taken off. No need to validate that it has done so for each scenarios, I can directly put it the correct value. It’s a contrived example, but that axiomatic aspect helps greatly when designing interfaces to reduce coupling between step 1 and step 2.