This is also accepted. It uses the formal Sie ("you"), which Duolingo introduces in a later lesson. When using the formal Sie, the verb conjugates in the same way as for the plural sie ("they"). Hence, when it's capitalised at the start of a sentence you can't tell which one it is without further context.
Lesen is the plural verb conjugation. Tricky to pay attention to context, good question
Since the first letter is capitalized it can be either you or they...nicht wahr?
Oddly enough, I got this wrong when typing in, "They are reading the newspapers". The pop-up message read "They are reading the journals".
Perhaps you made an unwitting spelling error, causing Duo to suggest something that was in the database. Your answer, as you wrote it here, is correct and accepted already. If you happened to take a screenshot of buggy behaviour, please report it here: https://support.duolingo.com/hc/en-us/articles/204728264-How-do-I-report-a-bug-
Why does Duo state "they are reading the newspapers" incorrect? And "they read..." as correct.
Because "news" and "newspapers" are not the same thing, so you've changed the meaning. I can read the news on the website of a radio station using my phone, but that isn't "newspapers" in any way.
"They read the newspapers" is not correct. It would be "They are reading the newspaper" or "They are all reading newspapers."
"They read the newspapers" is a correct translation of this sentence.
"They are reading the newspaper" is not, as you've changed it from plural Zeitungen to singular "newspaper".
"They are all reading newspapers" is not correct either, as you've added emphasis with "all" and lost the specificity from dropping the definite article die.