Okay so the basic argument is this
In the dream world, only the character's weapons (who are not possed by the Nightmares) are changed.
For example, Ruby's gun fires backwards, Yang's ember celica can fire enough force to splinter a tree, Blake's ribbon is really really long, and Jaune's sword is very big.
Nowhere on the website do they say that their base strengths got an increase. Only that their weapons got upgrades, like Blake' ribbon which shouldn't really matter much.
https://vsbattles.fandom.com/wiki/User_blog:TheRustyOne/Ice_Queendom:_WS
Here, we see Nega Weiss summon a big storm that was calced at small city
Later on in the show, Nightmare Blake fights Nega Weiss to a standstill and even manages to push her back a lot.
And even further along that, Yang is able to contend with Nightmare Blake.
Now, I know there are some who question whether or not this feat is even acceptable.
First, it was confirmed in the show that damage taken in the dream effects the body and aura in real life. For instance, when Ruby was cut by a thorn in the dream world, her hand started to bleed in the real world.
Second, Ice Queendom has been called "canon-adjacent" to RWBY. This means that, if nothing is too glaringly obviously out of the ordinary, it should fit right in with the mainline canon. In fact, nothing in IQ directly contradicts the main show. The main events of the series take place between V1 and V2, and serve as an expansion to V1 mainly, fleshing out Weiss's character devolpment as well as Team RWBY working together as a team for the first time.
In fact, at the end of episode 11, Weiss makes the rest of the team members to promise her never to mention the events of IQ again due to her being embrassed by it, which can explain why the never bring it up in the main seires.
In fact, other canon games in RWBY fall into the same territory. Like how no one mentions Grimm Eclpise or Arrowfell in the show, despite them being canon.
Third, that this feat is a major outlier. For that, I agree if one looks as the RWBY timeline as a whole. However, that is not a fair assesment. From a narrative point of view, the strength of these characters cannot be judged by their future actions in a series that is meant to be at the start of their journey. For those who may say that it is a radical jump in power, I point to the fact that OG Dragon Ball went from around mountain AP to planent all with one feat from Master Roshi, yet we all accept that.
So, to recap
In IQ, only weapons are affected, not base strengths
It is canon adjacent and fits perfectly in the RWBY timeline with no major contradictions
And it is not fair to call these feat an outlier when other seires have similairy done other radically increases of power
