Should a good system sound bad with bad recording?

Yes. Case in point...Robin Trowers' Bridge of Sighs, one of the greatest rock albums known to man, IMO, is absolutely un-F'ing listenable on a high-rez rig.

if your speaking of the legal so-called bootleg, commercially released, live pearl jam recordings, the answer is THE BETTER THE SYSTEM, THE BETTER THEY SOUND. they were intentionally left ruff around the edges, but were indeed made for quality hi fi playback. aside from female voclas and small chamber recordings, most hi end systems are put through a reality check with large orchestra, and live rock and roll. most fail........are they audiophile quality...of course not....but are they worth owning and playing...you betcha

I am not sure the issue breaks down as simply as "realistic and accurate" versus "euphonic." I think your system has to do PRAT well to be consistently enjoyable across the musical and recording quality spectrums. There are a lot of other factors, including the voicing of the speakers. But I am still trying to figure out all the issues and the right balance between them.

First of all, welcome back Slappy! Of course their is one option that is taboo in many minds, equalization.