Status quo, but Israel should prevent Palestinians from glorifying terrorism or teaching anti-Semitism. Freedom of speech is appropriate for most times and places, but not where an entire population is fed constant racist lies that incite everyday people to random terrorist murders on a weekly basis. Palestinians need to be deradicalized, just like Southerners during Reconstruction (which pretty much failed) or Germans after WWII (which succeeded very easily somehow).
Ideally, the territories would be annexed. Palestinians would be able to apply for citizenship but most either wouldn’t apply, or would be rejected for terrorist involvement. Even if all applied and were accepted, Israel would have a Jewish majority of over 2/3rds. (This is all explained in detail in Caroline Glick’s recent book.)
Demography is on our side, since Palestinians (like everyone else in the world except Jews) will keep having fewer babies as they become richer, and the charedim will keep having large families no matter what. Even if lots of people go off the derech or become dati leumi or moderate “new charedim” or whatever, the birth rate will still stay incredibly high.
Jordan is 80% Palestinians but they are disenfranchised there, due to discrimination and gerrymandering. It’s already a Palestinian state. All they need is a government of the people and by the people. It will happen eventually.
Israel can’t create a Palestinian state, when it will just mean more Iranian-funded terror (rockets), permanent ethnic cleansing of Jews from a large swath of our historic homeland, and an unstable banana republic on our doorstep.