Cut cable tripped breaker and left circuit dead after reset

I'm installing recessed lighting around my living room. I pulled power for these lights from an outlet circuit in the same room (see bottom right of photo). Everything was going according to plan, until I cut some excess wire with the breaker on but switch off. I'm no electrician, obviously. I thought this would be all right, since the wire was not activating my voltage tester when I installed the fourth recessed light in the ceiling. Nevertheless, when I snipped off the excess wire on the sixth light, the breaker tripped and all recessed lights as well as the devices plugged into the outlets around the room stopped working.

• The first thing I did was reset the breaker (twice), nothing works.

• Next, I used a multimeter to test Outlet 1 (hot to neutral, hot to ground), and I get a reading of ~250 millivolts but the voltage tester stays silent.

• Then I removed the outlet and used the voltage tester and multimeter directly on the wires coming into the outlet. Same result.

I'm almost certain the outlets (and recessed lights) receive power from a two-wire line (dashed orange line) tied into a hot bundle inside the box holding the three-way switch nearest the first recessed light. All wires appear undamaged, and each one set off my voltage tester. But this confuses me, because if there's power in that box and not at Outlet 1, then the problem must lie in that wire. Right? I hope that's wrong, because that would mean tearing out a lot of drywall to replace that wire. It seems crazy that cutting the wire all the way at the end of the circuit could somehow damage the middle of the first wire run in the circuit.

What am I missing? Also, what even happened here? With the switch off, how was that wire at the end of a string of lights energized?