I don't think it's cruel to dress dogs up on occasion. There are a lot more serious problems in the world than someone putting a sweater on their dog. Of course dogs should be dogs and probably shouldn't be dressed up on a day to day basis. There's something a little weird about that.
On Christmas my mother would sometimes dress our dogs up with miniature dog reindeer antlers and sweaters but right after the photographs she'd take them off. Although our dogs didn't seem to mind wearing clothes at all. Some dogs are visibly distressed when forced to wear clothes. If people put clothes on a dog that’s resisting or obviously distressed that's undoubtedly cruel.
I think it all the depends on the individual dog in question. One of our dogs didn't like wearing the antlers so my mum never put them on her whereas one of our other dogs seemed to prance around showing off ha ha. She probably liked the attention.