This is really an interesting discussion. While I've never thought about exploring Existentialism in D&D or Sword and Sorcery, I have had ideas to explore it an urban fantasy/low-level supers style conspiracy theory-laden game and toy with the player's expectations of whether they really are facing a supernatural threat or that they are victims of self-delusion. Are we really heroes or are we deluding ourselves into beieving ourselves heroes in a narative that we've created to feel empowered against a reality in which we ultimately are inconsequential.
Speaking of which, I think both Sword & Sorcery and existentialism have to be done without alignment. Right and wrong are subjective, at least insofar that any objective right or wrong is unknowable by humans and unprovable by reason. There is no magic spell that can determine who is good or evil, and players and GMs can fall back on a monster description saying so.
Which is where faith enters the picture. Trust that your path is just, even when you can't prove it, and trust that your intuition and emotions on values actually helps promoting what you consider to be good.
But it also means acknowledging that you're flawed, and that you can make mistakes and be mislead. Your convictions have to be questioned and compared to your new experiences and knowledge. Heroic and virtuous characters have to accept that they did wrong in the past and change so that they will do better in the future, instead of continuing with something that has become doubted to avoid the consequences of past mistakes.
I think change is actually quite a big element in existentialism. Some guy or another created the phrase "existence precedes essence", which opposes and rebukes the idea of Platonic Ideals. Things don't have a fixed nature that exist as a universal abstract that manifest themselves in the world as physical objects. The essence of a thing does not exist as an ideal even before the thing itself appears in reality. Things, and the one thing it's really all about is a person, begin their existence as a blank slate. What defines a being are the things it experiences, does, and thinks. And as such, all beings are in a constant process of changing, or more fancifully, in a constant state of becoming.
Which is not necessarily a process of improving. Corrupted heroes fit perfectly into even the most broad strokes abstractions of Sword & Sorcery, but in the same way there needs to be a space for redeemed villains as well. Though I think to keep with the overall tone, people shouldn't be expecting miracles. Vile genocidal maniacs won't suddenly renounce the Dark Side and join Team Heroes because they lost a duel and suddenly find themselves not wanting to be killed by the hero.
Evil (as a subjective judgement, of course) becomes a lot more meaningful if doing evil things is not in the nature of villains and monsters, but a choice. Villains who do evil things but can freely chose not to are much more interesting antagonists.