man systemctl says:
daemon-reload Reload systemd manager configuration. This will rerun all generators (see systemd.generator(7)), reload all unit files, and recreate the entire dependency tree. While the daemon is being reloaded, all sockets systemd listens on behalf of user configuration will stay accessible. This command should not be confused with the reload command.
So, it’s a “soft” reload, essentially; taking changed configurations from filesystem and regenerating dependency trees.
Generators are small binaries that live in /usr/lib/systemd/user-generators/ and other directories listed
above. systemd(1) will execute those binaries very early at bootup and at configuration reload time — before
unit files are loaded. Generators can dynamically generate unit files or create symbolic links to unit files
to add additional dependencies, thus extending or overriding existing definitions. Their main purpose is to
convert configuration files that are not native unit files dynamically into native unit files.
Generators are loaded from a set of paths determined during compilation, listed above. System and user generators are loaded from directories with names ending in system-generators/ and user-generators/, respectively. Generators found in directories listed earlier override the ones with the same name in directories lower in the list. A symlink to /dev/null or an empty file can be used to mask a generator, thereby preventing it from running. Please note that the order of the two directories with the highest priority is reversed with respect to the unit load path and generators in /run overwrite those in /etc. After installing new generators or updating the configuration, systemctl daemon-reload may be executed. This will delete the previous configuration created by generators, re-run all generators, and cause systemd to reload units from disk. See systemctl(1) for more information.