Yeah, I do buy 'Sephiroth, man whose entire life has been dedicated to killing the Other, discovers he is the Other and therefore all humans are the Other to him' combined with 'Sephiroth, man who has not slept in literal days' and 'Sephiroth, man who's just discovered the man he respected sorta like a father lied to him his entire life' could result in him having a psychotic break like this.
But also, uh, the sudden obsession with and beeline to the grotesque eldrich horror hidden in the reactor might indicate more than just 'normal psychological problems'? I definitely look at Jenova and think 'this is some sort of horrible gribbly Thing That Should Not Be' and that sort of thing has its own set of story beats - and Cthulhu stuff is extremely popular in Japanese geek culture, so I have no doubt it'd come into play here.