Shortly before the events of Dishonored 2, Stephano wrote a letter to his aunt, Lucy, detailing some disturbing dreams he had been having. In a return letter, Lucy described how she believed that these dreams were visits from the Outsider who, in return for "sexual favors", would give Stephano a gift. Lucy disclosed that she too had been visited in that manner, and gave in many times until she was cursed with an "untreatable pox". She concluded the letter by telling him that they would discuss it more when they next met.
If Corvo Attano or Emily Kaldwin has robbed fewer than three black market shops, two musicians set up just outside the shop in the Palace District during the mission The Grand Palace. Stephano can be found listening to their music, along with a woman and a female aristocrat. Unless the protagonist scares him off by attacking someone, he stays there, dancing to the music.
If more than three black market shops have been robbed, the Howlers have set up an ambush in the area, meaning the musicians and their audience, which includes Stephano, are nowhere to be found.