No, it shouldn't update. I tried to explain all of these in this thread. However, you are wrong on something. Even if you delete the contacts cache, the PSMs and display pictures will still remain for your contacts. Because PSMs and DPs aren't stored in the cache files, I think they are stored at another place. However they are never stored on the server side.
Storing display names at the server is useless because normally every Messenger user is supposed to keep contacts cache on his/her computer. So no need to store it on the server for a few percent of users who doesn't keep cache. The contacts whose old nicknames you see when you delete cache are already offline contacts
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