This is absolutely fake news, and comes from a website that gave time to someone who said Dante and Arthur Morgan would be the last two DLC characters simply because they said Sephiroth would be next when they weren't the first nor the only one to come out saying that.
First off, Sakurai for sure understands how the community feels. I know people give him **** for no reason, but when you look at the non-first party picks of this DLC as well as just the majority of the picks for the base game, it's clear he has been paying attention to what people have been asking for and he even acknowledged us Geno Bros directly. So, we know Sakurai knows.
Nintendo has made it clear they also know there is a demand, what with that tweet back when having us vote Team Geno or Team Mallow as well as sharing SMRPG stuff every now and again, in addition to communication with Sakurai. There is no confusion: we want both Geno in Smash and more SMRPG, and most of us think Geno in Smash gives us a better chance much like Megaman and most likely Banjo even if Microsoft doesn't want to reveal the game this decade. Plus, the backlash with Paper Mario and how we all have been reacting to things like AlphaDream falling apart or constantly putting Geno into stuff like Rivals of Aether and Friday Night Funkin and all the fan art and music covers/remixes...never forget people are paid money to keep track of what consumers are talking about. So, we known Nintendo knows.
The real question is if Square knows, and I can only assume that for the same reason that Nintendo would know, they would also know. Remember that Square is in this awkward situation with all the SMRPG stuff they own the rights to: if they make any SMRPG stuff without Nintendo, that means no Mario or Mario accessories...and then it's just SRPG or even just plain RPG. That certainly won't please us. However, if they only wait until they can work with Nintendo, that adds many more hurdles and a lot more effort and time.
Also, don't forget that Square seems to be a bit slow on the draw and only recently have they been catering to their fans as much as possible, while still dropping the ball with stuff like Avengers. It took over two decades for them to properly remake their most popular game of all time despite demand for it long before then, and it only happened after the negative reception of FF13, the continued negative reception of it's sequels, the flop of original FF14, and major financial losses to where the company was nearing the brink. Don't forget that they were pushing Sakurai to choose Lightning or Noctis over Cloud back in Smash 4, so it only makes sense that with the success of that DLC and the massive success of FF7R that they would now push for Sephiroth.
What with all these remakes of classics people love, and re-releasing the originals (with some of them hitting outside of Japan for the first time) and even updating and adding more to them AND all these new games, it's clear Square is finally on course to please their fans, although their E3 this year was very lackluster so we will likely have to wait to see more. In addition, talks between Nintendo and Square have happened as well as talks for Smash with Sakurai, so there is no way they don't know of the demand, and with Nintendo and Sakurai understanding what we are asking, it would take Square having many people with below-average intelligence to not get the memo that we just want more SMRPG wherever we can get it.