setTimeout schedules a function to be executed after a delay, and the "scheduler" function's stack isn't preserved, so a stack overflow will not occur directly due to the setTimeout.
In general, many browsers enforce a minimum timeout for functions scheduled this way (so even if you pass 0 as the timeout, or don't pass one at all, the function won't be scheduled immediately). Even if this isn't the case, the function gets added to a queue of waiting operations, and will be delayed if something else if executing.
As a side note, there's no need to pass a string to setTimeout. It gets eval'd, which is sometimes insecure and generally slow. Better to just pass a function reference: setTimeout(func2, dynamicTimeout).