On the rare chance that someone else stumbles across this problem ...
By default, Java's Xalan transformer for creating XML documents does not correctly encode emojis. Instead of 👍 for the thumbs up emoji, Xalan encodes it as ��. As Arthur pointed out, this is not a valid entity encoding.
One solution is to use Saxonica's Saxon 11 transformer, which produces the expected output:
<html>
<head><meta charset="utf8"/></head>
<body>
<p id="caret">the 👍 emoji</p>
</body>
</html>
In Java, switching to Saxon entails installing the Jar files for Saxonica and its resolvers. Then set the system property before invoking the XML transformer: System.setProperty( "javax.xml.transform.TransformerFactory", "net.sf.saxon.TransformerFactoryImpl" );
ConTeXt handles the emoji from the transformed XML file without any issues.
Thank you, Arthur.