I just learned that if you deactivate the OneDrive "save space and download files as you use them" feature (i.e. leave all OneDrive files on your PC) then the thumbnail problem is fixed. In addition, the Photos app now shows these files (which it did not do before, even though the files were locally "always" stored on the PC).
There is clearly a bug in the change to OneDrive -- don't get me wrong, the selective sync feature is nice, but it is affecting the thumbnail process somehow.
Moderator's note:
You can disable OneDrive Files On-Demand feature using these steps:
- Right click OneDrive icon on taskbar, select Settings.
- In Settings tab, under Files On-Demand, uncheck Save space and download files as you use them option.
- Click OK.
Note: Microsoft has updated the information in this reply, to benefit users facing this issue.