Cloud is vaguely aware of Sephiroth's connection to the great sword and so he can understand the fixation with it to a certain extent but the finer details are missing, mostly through ignorance of all the facts. What little he remembers from Zack's talks with him during his mako haze that involved the previous owner of the sword revolved around Zack's connection to it. Even he can pick up on the young Sephiroth's concern over it though.

"It'll get fixed." He says it even as he wonders why Sephiroth's concern matters to him. In the end, he decides it doesn't matter why. Here and now at least it does. That's enough. He looks inside but can't find any of the pent up aggression or fury toward the small child in front of him, no matter who he may be. His eyes go back to Midgar.

"That's a good idea. There's no future there anymore. It's time to start new."