However, according to the second law of thermodynamics, entropy in an
isolated system will spontaneously evolve towards the maximum
Yes, but the maximum will be achieved when the system is in equilibrium internally. If your system is in internal equilibrium its entropy will not increase.
This means the objects kinetic energy should be transferred as heat
to thermal energy, as that will maximize entropy.
What part of the object’s kinetic energy are you referring to? The macroscopic kinetic energy of the center of mass of the object due to its velocity with respect to an external frame of reference? The object’s internal microscopic kinetic energy of its atoms and molecules which gives rise to the temperature of the object?
Heat is energy transfer between objects due solely to a temperature difference between the objects. Its energy transfer at the microscopic level. If your moving object is thermally isolated from other objects there can be no energy transfer from your object to others in the form of heat lowering its temperature and increasing the temperature of the other object, for an net increase in entropy.
The transfer of the macroscopic kinetic energy of your moving object to other objects would require some type of mechanical interaction with something else. Examples are inelastic collisions with other objects and dissipation of energy by some other form friction, both of which produces entropy. Again, if your object is physically isolated from interacting with any other objects this would not be possible.
and why Newton's first law "wins out" in the end?
Newton’s first law only applies with respect to the velocity of the object as a whole and its macroscopic kinetic energy, because it will not change unless the object is subjected to a net external force. But Newton's first law does not apply to entropy production due to heat transfer, if such transfer were possible. The velocity of an object is not normally effected by its temperature.
Bottom line: if your object is thermally and mechanically isolated from any other objects, and it is in internal equilibrium (e.g, no temperature gradients within the object) entropy would be maximized within the isolated system.
Hope this helps