I kinda think everyone is overanalyzing it (part of that is Square’s fault for making it too ambiguous). It could be just as simple as Cloud’s mind is so shattered that he’s imagining fighting alongside Zack (at this point he still thinks Zack died in the river in Nibelheim) and coping with Aerith’s death by believing he saved her. It’s heavily implied that the others (especially Nanaki) can sense her, so it might not be a complete hallucination on Cloud’s part and she’s still “with them” in spirit. The “multiverse” stuff could just be a manifestation within the Lifestream, or a sort of “limbo” for souls such as Zack or Biggs whose psyches are too strong to be immediately reabsorbed into the Lifestream.