Quick answer: Project Settings → Rendering → Custom Depth-Stencil Pass = Enabled with Stencil. Actor → Render CustomDepth Pass = true, Stencil Value = 1. Material samples SceneTexture:CustomStencil.

You enable Render CustomDepth Pass on a few actors. Outline post-process should highlight just them. Whole screen gets affected.

The Fix

Project Settings → Rendering:
  Custom Depth-Stencil Pass:    Enabled with Stencil

Actor (Mesh Component):
  Rendering → Render CustomDepth Pass:  true
  Custom Depth Stencil Value:              1

PostProcess Material (PP_Outline):
  Sample SceneTexture: CustomStencil → if == 1, apply outline color
  else, return scene color unmodified

Stencil value gates which pixels the post-process touches. Without the project setting, the stencil buffer is unused and the comparison always fails.

Verifying

Tag enemies stencil = 1. Outline applies to enemies only. Background unaffected.

“Pass enabled. Stencil tagged. Mask isolates.”

Related Issues

For PostProcess alpha, see PP alpha. For RenderTarget canvas, see RT canvas.

Stencil value. Material reads. Mask works.