If I want to say to a group of people that they are each other's friends, can I say:
or should absolutely say:
You're each other's friends
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I think I got your point, the answer is Yes
In standard English, you is both singular and plural; it always takes a verb form that originally marked the word as plural, (i.e. you are, in common with we are and they are).
That means while using "You", you are already referring to the group of people, and thus making the "friends" or other adjective/adverb/clauses/etc. pointing to all subjects of "You".
Your sentence is grammatically correct, however the context is important.
Usually when speaking about a small group of people (say 4 or less), one would could say
Why were you fighting with him? You're friends, aren't you?
The three boys are friends of each other
When speaking to or about a group of people, one would usually say
you're all friends
Settle down team, no need to argue, we're all friends here.
The team are all friends of each other
"You're friends" can also work with groups, but all usually gets added to emphasize the whole.
"Each other" is implied when speaking about friendship between people, it can be used for emphasis or if there is ambiguity between whether the friendship is between two people, or between the two people and a third person.