I have two theories as to what happened in the ending. The first theory is that baby is Jessica reincarnated somehow. The proof of it is the neck wound on Jessica's neck disappearing after collecting all the documents and notes. The second theory makes more sense: In the comics, the Walrider was dispersed thanks to Murkoff's weapon, forcing it to use a colony of ants as its host. The mind controlling towers placed around the village are related to the Morphogenic Engine, the very tool used to create the Walrider in the first game, hence the insanity and the phantom pregnancies. The Walrider could have also used the cultists as potential hosts, since, as Dr. Rudolf Wernicke pointed out, the subject has to be in a close proximity to death and experience overwhelming madness and more than enough horror to not only activate the Morphogenic Engine but become the host. This is something Sullivan Knoth, his followers and the heretics have accomplished by killing their own children and experiencing nightmares made by the radio towers. Knoth, under the influence of Murkoff, began to kill his own children to prevent the Walrider from gaining a host. So, either the Walrider used Lynn's baby as a potential host and her words, "There's nothing there." is her mind succumbing to the same madness, or there really is no baby and the Walrider is now using Blake as its host, taking advantage of his guilt and hallucinations. And as for the baby casting no shadow, it's probably a developer error.