[BUG] docker compose config regression - traverses parent dirs before applying .env

[MikaelElkiaer]

Description

Since v2.24.4 (possibly before) some behaviour has changed in how docker compose resolves configuration.
It used to apply .env located in cwd, before traversing parent dirs to look for a docker-compose.yaml.
This has changed, as it will now traverse parent dirs and if it finds a docker-compose.yaml it will instead look for a .env in that directory.

Steps To Reproduce

1. With files:

# ./docker-compose.yaml
services:
  parent-service:
    image: alpine

# ./root/subdir/docker-compose.yaml
services:
  subdir-service:
    image: alpine

# ./root/.env
COMPOSE_FILE=./subdir/docker-compose.yaml

2. with cwd ./root, run docker compose config - it used to be the config based on the subdir, but now it is based on the parent dir.

Compose Version

❯ docker compose version
Docker Compose version 2.24.6
❯ docker-compose version
Docker Compose version 2.24.6

Docker Environment

❯ docker info
Client:
 Version:    25.0.3
 Context:    default
 Debug Mode: false
 Plugins:
  buildx: Docker Buildx (Docker Inc.)
    Version:  0.12.1
    Path:     /usr/lib/docker/cli-plugins/docker-buildx
  compose: Docker Compose (Docker Inc.)
    Version:  2.24.6
    Path:     /usr/lib/docker/cli-plugins/docker-compose

Server:
 Containers: 1
  Running: 0
  Paused: 0
  Stopped: 1
 Images: 168
 Server Version: 25.0.3
 Storage Driver: overlay2
  Backing Filesystem: extfs
  Supports d_type: true
  Using metacopy: true
  Native Overlay Diff: false
  userxattr: false
 Logging Driver: json-file
 Cgroup Driver: systemd
 Cgroup Version: 2
 Plugins:
  Volume: local
  Network: bridge host ipvlan macvlan null overlay
  Log: awslogs fluentd gcplogs gelf journald json-file local splunk syslog
 Swarm: inactive
 Runtimes: io.containerd.runc.v2 runc
 Default Runtime: runc
 Init Binary: docker-init
 containerd version: 7c3aca7a610df76212171d200ca3811ff6096eb8.m
 runc version:
 init version: de40ad0
 Security Options:
  seccomp
   Profile: builtin
  cgroupns
 Kernel Version: 6.6.20-1-lts
 Operating System: EndeavourOS
 OSType: linux
 Architecture: x86_64
 CPUs: 16
 Total Memory: 31.13GiB
 Name: me-ks-workstation
 ID: LZUL:AHQY:J4CD:JHCE:7JGD:RRWI:YO7G:AHMS:LUAW:YOQ3:OQCG:HB37
 Docker Root Dir: /var/lib/docker
 Debug Mode: false
 Experimental: false
 Insecure Registries:
  127.0.0.0/8
 Live Restore Enabled: false

Anything else?

No response