Created a 640x400 32bit game using AGS 3.40 and ran it on Win 7 / GeForce GTX 970
Driver: didn't matter
Mode: Desktop resolution: (1920 x 1080)
Scaling: Stretch to fit screen (preserve aspect ratio)
I'm getting an image scaled to 1728x1080, with narrow black bars on either side, exactly like it's supposed to be.
Choosing 1280 x 720 also worked fine, btw.
Edit:
The youtube video suggests this is played on a laptop with a Desktop resolution of 1366x768.
Using the above settings on my own 1366x768 laptop, the game is again scaled perfectly fine: just narrow black bars on both sides.
I can also easily replicate the video: when I switch to "Max round multiplier", which is x1 due to 768/400 = 1.92, that's what I see on the screen: a huge black border on all sides.
Edit2:
Which is exactly what happens when AGS can't find a acsetup.cfg file, btw. I deleted the one in the game folder and the one in ~/Saved Games/[Game Name]/ and the engine fell back to "max round multiplier".