That's true. However, if Palestinian self-determination includes letting an Iranian proxy like Hamas (or Hezbollah in the case of the Lebs) rebuild it's military capability.... what then?

Bad things.

I've said many times on these threads, there are no good outcomes. There's no easy way to square Israel's security interests with Palestinian self-determination, given the non-trivial possibility that a Palestinian state ends up being governed by Hamas or another of Iran's "Axis of Resistance" proxies.

Advocates for a two-state solution elide that problem by pointing out - correctly that continual conflict with the Palestinian people is bad for Israel's security because it just keeps creating new terrorist enemies. But that doesn't mean that creating a Palestinian state is better for Israel's security, because a sovereign state risks increasing the capabilities of Israel's existing terrorist enemies.

But the fact that there's no good solution doesn't mean the problem doesn't exist - or that the problem is simple.