Fried wiring

I've got a question I'm hoping you all can help me with. I'll try to keep this as brief as possible.

Tonight while replacing an outdated outlet, we wound up with some toasty insulation. There are also two switches that were replaced just before the outlet in the circuit.
After replacing the outlet and two switches, but before pushing everything back into the receptacles, I flipped the breaker back to test all of the devices. The outlet and lights all functioned properly, so I flipped the breaker again, folded the wires into the receptacles, and tested again. As soon as I flipped the circuit back on I heard the outlet pop. Upon examination it was easy to find where the arc had occurred, due to the blackened spot on the box. I was able to trace this to a nick in the insulation I had missed earlier, which made contact with the box. I was able to snip off the burnt insulation and connect a new outlet, to ensure the previous unit wasn't fried, but it still didn't work. I checked the wires in the receptacle with a voltage detector and found that none of the wires were live any longer.

The switches upstream in the circuit work fine, and none downstream work, which makes sense given that the wires in this box seem to be fried. What I can't make sense of is how the circuit seems to interrupted halfway between two receptacles. I am not an expert, but I would have thought a short in the circuit somewhere else would cause the breaker to continually flip and no devices on this circuit would function.

The only uneducated guess I have is that the short caused damage to the light switch that is upstream, and caused the circuit to stop there. I haven't yet had time to test this theory by swapping out that switch though, and I would love any input!

Thank you all