OK yeah, that might be a problem. You want to set the dns in the dnsmasq so it can resolve stuff upstream (probably with DoT or DoH), and the dns in pihole to the IP of dnsmasq. Look into the "dns", "dns_search" and "dns_opt" compose directives.
You may also want to consider simplifing your stack by using only dnsmasq or only pihole. Both of them can do pretty much the same things if you add some plugins.
I'm using dnsmasq as lan dns server with DoH upstream as well as dhcp server. The dnsmasq is advertising itself as dns to all the dhcp clients. Also it runs on the router which allows it to hijack port 53 so any client attempting to do clear dns elsewhere ends up going through dnsmasq anyway. It also has an adblock plugin.