ActivityPub is absolutely not suited for private communication. I guess you could in theory transfer encrypted content over AP as well, but it's not what it is designed for and it generally makes little sense for content in a public forum like this. I don't think anyone thinks otherwise.
This is not what is proposed though. For E2EE, Rimu suggests the following:
Encrypt all user communications, private messages, and sensitive data
So to keep user data encrypted on the server, as well as looking into finding a way to encrypt private messages. I think it's hard to argue this wouldn't be at least a minor change for the better, giving instance administrators less insight into the private data of the users (and thereby also making them less vulnerable to law enforcement).
Of course this wouldn't make PieFed or Lemmy or whatever a good replacement for Signal. It is not supposed to be. It's a public forum. But it can still do its best to protect the identity of the users in this public forum, even with the inherent limitations of the format.