If he is sleeping and you caress his penis, does it manifest in his dreams? or can he actually feel it unconsciously?

Who knows?: I highly doubt that this has been studied. If he gets erect, then his body is aware of it. However, he may still be asleep. If he ejaculates he could still be asleep. If he happened to be in rem sleep, then he may have had what he thought was a wet dream. Ask him sometime or awaken him while doing this and see if he recalled any dreams.