This button determines the the object list display scope. Normally only the direct child objects in the currently selected container are shown in the object list panel. If the Show objects in all subcontainers button is pressed, then you got a list of all the objects that are stored somewhere in the entire subtree under the currently selected container:
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You can configure the object list scope as well with the menu option View
- List Output Settings - Show Objects in all Subcontainers.