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Pulumi does not diff against the cloud by default. 

But even if you do do a refresh (which reconciles state with the cloud), it is frequently the case that the state recoverable from the cloud providers is not a sufficient description of the desired state, so the previously applied desired state is still necessary for diffing. 

You can see this in many others IaC ecosystems - Terraform of course, but also the `last-applied-configuration` annotation used by kubectl. 

ah-ha, I had presumed that `update` was doing a `refresh` implicitly

I confess to not being familiar with terraform. I'm currently tinkering with pulumi and AWS CDK; the latter's lack of distinct "last-applied" state is what motivated the question.

Well - solutions like ARM and CloudFormation which are 100% cloud-hosted may very well be managing last applied configuration purely within the cloud backend.  It would be mostly invisible to you - but could still be there.  In principal, the same is true if you use the Pulumi Service backend - you effectively never need to think about state files.