Tumorigenesis depends on intricate interactions between genetically altered tumor cells and their surrounding microenvironment. While oncogenic drivers in lung squamous carcinoma (LUSC) have been described, the role of stroma in modulating tissue architecture, particularly cell polarity, remains unclear. Here, we report the establishment of a 3D coculture system of LUSC epithelial cells with cancer-associated fibroblasts (CAFs) and extracellular matrix that together capture key components of the tumor microenvironment (TME). Single LUSC epithelial cells develop into acinar-like structures with 0.02% efficiency, and addition of CAFs provides proper tumor-stromal interactions within an appropriate 3D architectural context. Using this model, we recapitulate key pathological changes during tumorigenesis, from hyperplasia to dysplasia and eventually invasion, in malignant LUSC spheroids that undergo phenotypic switching in response to cell intrinsic and extrinsic changes. Overexpression of SOX2 is sufficient to mediate the transition from hyperplasia to dysplasia in LUSC spheroids, while the presence of CAFs makes them invasive. Unexpectedly, CAFs suppress the activity of high SOX2 levels, restore hyperplasia, and enhance the formation of acinar-like structures. Taken together, these observations suggest that stromal factors can override cell intrinsic oncogenic changes in determining the disease phenotype, thus providing fundamental evidence for the existence of dynamic reciprocity between the nucleus and the TME of LUSC.