The 3rd paragraph of section 5.4 says "The PMDX-126 asserts the E-Stop signal to the PC as long as it is in “Test” mode." So, yes, EStop should be asserted.
I think what you have to do is set the DIP switches for the desired test mode, then press and release the test button to put the PMDX-126 into "test" mode. THEN, press and hold the button to generate step pulses. See if that works.