Apart from the fact that Mel Lastman would have yelled bloody murder, it makes sense from the perspective of a decision-maker in 1995 that Sheppard would go ahead and not Eglinton.
It was 18 years ago, and everything about Toronto: ridership, development and governance was completely different back then. Nobody would have been able to anticipate a forced amalgamation of the Metro municipalities; ridership was at an all-time low (wasn't it around 350M/year?), reeling from the closure of major manufacturing plants (Inglis, GM on the Golden Mile, etc.) and the loss of jobs south of the 401. Gas prices were at an all-time low, and almost all of the growth was being directed to 905 auto-oriented sprawl. If a ridership case could have been made at all, it made more sense, at that time, for a subway along Sheppard.
Transit technology thinking was also completely different back then and LRT was still relatively unpopular in North America in the early 1990s. In the US, there were a handful of relatively new systems in California and some expanded legacy streetcar networks like Boston, Cleveland, Pittsburgh, etc. as well as some abject failures like Buffalo. In Canada, there was the line in Edmonton, expensive and overbuilt for what was then a stagnant city of 700,000, and Calgary, which was reasonably successful but not quite the success story it is today. You would have had to be a policy wonk or transit enthusiast to really know what LRT was. I wasn't very old back then, but I remember serious ideas of floating an LRT along Sheppard (which, with the same amount of money as the subway could have been built from Yonge to STC at the time) were only voiced after the subway was under construction and was already a fait accompli.