"Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances"
I love that the aclu and liberal judges only focus on the first part 'establishment' of religion. And never the part about prohibiting the free exercise.
IMHO telling the school to remove the sign is equivalent to prohibiting religion.
Your mistake is a failure to understand whose behavior the First Amendment prohibits. It is NOT a prohibition on private behavior. It doesn't say, "Citizens must allow free speech on their private property." The Bill of Rights is aimed at
government, state action. It doesn't apply to the actions of private people.
The meaning of the First Amendment is pretty clear--it's not meant to say that the government can "freely exercise" religion, which would completely contradict the first part of the sentence. Rather, the free exercise clause is aimed at preventing the government from telling people where and when they can worship (on private property) and what religious practices they can maintain.
The important part about the free exercise clause is that it ends up being in conflict with many laws that aren't aimed at directly religion such as prohibitions against polygamy and marijuana usage in religious ceremonies. Another example is religious parents refusing to allow their children to receive life-saving medical treatments. That's where the free exercise part comes up.