Hamas will have successfully created thousands of new terrorists with their action. I don't think Israel's "retribution" is going to do what they think it is going to do. OTOH, Hamas does need to be eliminated based on their behavior, but doing so without injuring the innocent is difficult to impossible.

I'm not sure what you think Israel thinks their actions are going to do. They're well aware that their retribution will spawn many more new terrorists, and that there's no way to eliminate Hamas without injuring a lot of innocent people or creating thousands of new terrorists. They know full well that whatever they do, things will be worse than they were before the attacks. Even if (or especially if) they did nothing in response.

Again, there is no "good" outcome here. Only least-bad outcomes.

Israel's goal is to eliminate the experienced, entrenched, and well-organized terrorist organization. That has two beneficial consequences, even if there are loads of bad consequences. The first, it makes it clear that any future attacks that are able to achieve this level of atrocity will result in the destruction of the organization and people that perpetrate them. And second, you replace the experienced and well-organized terrorists with inexperienced new terrorists. Even if the latter are more numerous (at first), you'd rather have a bunch of newcomers to the fight than battle-hardened veterans.

The outcome will be terrible, and it will result in thousands of new terrorists - and it will still be better (in their estimation) than inaction or a token response.