The properties are added in order, so if you want to override existing properties, you need to put them at the end instead of at the beginning:

return {
  value: {
    ...initialState,
    ...newObject
  }
}

You don't need newObject (unless you already have it lying around), though:

return {
  value: {
    ...initialState,
    isAvailable: newValue
  }
}

Example:

const o1 = {a: "original a", b: "original b"};
// Doesn't work:
const o2 = {a: "updated a", ...o1};
console.log(o2);
// Works:
const o3 = {...o1, a: "updated a"};
console.log(o3);

That's because spread will not combine the objects recursively.

Take a look at this simple example where it works as you expected:

const state = { 
        entities: { 
                    people : { 
                              1 : { id: 1, name: "jim" },
                              2 : { id: 2, name: "billy" }
                             }
                  },
        result : [ 1, 2 ]
    }
    
    const payload = { 
        entities: { 
                    people : { 
                              7 : { id: 7, name: "sally" },
                              8 : { id: 8, name: "ana" }
                             }
                  },
        result : [ 7, 8 ]
    }
    
    const new_state = { 
        entities: { 
                    people : { 
                              ...state.entities.people,...payload.entities.people
                             }
                  },
        result : [...state.result,...payload.result]
    }
    
    console.log(new_state)

You spread syntax on right hand side.

Note: Use Spread Operator first then set the new property. For example {c:'D',...foo} will not work.

let foo = {a: 'A', b: 'B', c: 'C'};
let res = {...foo, c:'D'};
console.log(res)

Is there a way to update the 'settings' property in this function without the need to rewrite it whole?

It's hard to tell from your question quite what you're really doing, but if the goal is to add newdata to the existing settings, you're just spreading it in the wrong place:

function foo(newdata) { 
     utils.method('GET', '/auth', {
        response: {
          data: {
            settings: {
              last_email_notification_shown_date: new Date(),
              email_notifications: null,
              ...newdata // <============================ moved
            }
          }
        }
      });
}

then

foo({
   SomeNewProperty: 'whatever'
});

If you need to call foo with an object with things outside settings and also within settings, then it gets slightly more complicated, but not a lot:

function foo(newdata) { 
     utils.method('GET', '/auth', {
        response: {
          data: {
            ...newdata,                     // <========================
            settings: {
              last_email_notification_shown_date: new Date(),
              email_notifications: null,
              ...newdata.settings           // <========================
            },
          }
        }
      });
}

then

foo({
    settings: {
       SomeNewProperty: 'whatever'
    },
    otherStuff: "foo"
});

That spreads newdata (including settings), but then overwrites newdata's settings in the new object with a replacement settings, in which we spread newdata.settings.