Look, you can make the argument that "Israel is occupying Palestinian land" all you want. Maybe it's true. Emotionally and legally, maybe Israel is in the wrong. But logically, does Palestine deserve Jerusalem? I don't think it's the smart thing, because Palestine is concerned about Palestine and not much else. They don't want to share the historical sites, and refuse to acknowledge its historical significance beyond "Islam-Islam-Islam!" as if Islam is somehow the only "legitimate" religion and others have to apologize... for not being Muslim? Look, the governments of Palestine are a bunch of Muslim-supremacists with little regard beyond their own little world. Giving them Jerusalem does not mean they will suddenly "progress" and join the modern world. Giving Jerusalem to Palestine would be as stupid as giving Massachusetts to Iraq. Until the governments of Palestine get their shit together, maybe for starters stop praising terrorists who stab mothers with children, then maybe Palestine could lay claim to Jerusalem.

tl;dr: Palestine may have a legal and emotional argument, but because its government is backwards, they won't do anything with it that actually benefits the city other than gloating about it.