Personally I love leetcode style problems. They’re fun. And useful - I use this stuff in my job constantly.
E.g. optimising client side code where N is likely never to be above 300, but instead of few simple lines, write a complicated solution to make sure it can scale to billions and beyond.
I would take any problem solving energy and spend it on side projects instead of doing leetcode. I do like those exercises, but I enjoy building new things more and which gives me practical experience which I think is more important.
You might get false positives as well. E.g. you get people who are tunnel visioned on leet code, cracking the coding interview and other common system design books, they know all the answers, but then they completely lack common sense day to day and it can be hard to test for that if you are solely focusing on leetcode.
As an interviewer, I care about their skills - technical skills (like debugging ability and CS knowledge), social skills (can we talk about our work together?) and judgement. Your ability to understand data structures and algorithms is signal, but there is a lot more to a good candidate than knowing how to make a bit of code run fast. Knowing when to make code fast is, as you say, just as important.
I’m sure plenty of people spend their career never learning or using data structures and algorithms knowledge. But I suspect plenty of people spend their career using this stuff all the time. Eg people who work in databases, compilers, operating systems, video games, ai, crypto currencies, and so on.
I would almost believe the opposite: if you actually pass those tests with flying colours, it shows me that you believe you needed to do that to be hired, while someone who's actually experienced would never in a million years step down so low.