How would you react to an E2 who "smart mouths" you in formation?

Clear the room. Find out whether he is having external issues, be empathetic, but also emphasize his role in taking care of his problem. Stress his responsibilities to the unit mission and his teammates come first. Offer assistance to get him the help he may need and follow-up if necessary. BTW his outburst won't get him out of performing extra duty.

Similar situation happened to me in Okinawa while stationed over there. I was the COG and this Marine private spouted off to me and told me to F off during formation when I directed him to fall behind the NCO's in formation, without hesitation I took my Kevlar helmet off and smashed his nose with it. My MSgt and LtCol NJP'd him for not following direct orders and told me that is how you garner respect nobody else talked back to me while I was in charge or gave orders!

Knock his dick in the dirt.

Smoke everyone for the next 2 hours and pull him in the office and have him explain himself to me and another NCO. Or if he feels uncomfortable talking with me 2 other NCOs.

In the words of my DI, back in 79, "I can't make you do anything, I can only make you wish you had done it."

I must be old. I cannot even imagine this scenario, let alone discuss how it should be handled. I was a paratrooper in the 82nd in early 1980s. This E-2 would have gotten his ass kicked repeatedly by the E-5 and team mates for less than this and it would have never gotten to this extreme point, ever.

He would get burnt quickly

First some pushups then a talk with him and his squad leader , after everyone has left for their assigned tasks do not cuss at him because that will not achieve nothing but more friction between you and him and do nothing but make maters worse

Nip it in the bud!

Give him the blow he got, that is the right thing.