I would even prefer the 3.5 inch screen over the 4 inch display on the iPhone 5.
Right on!
After using smartphones for years, iPhone from the beginning and occasional experimentations with Androids and Blackberrys, I reached a conclusion that a smartphone should really be a "mobile" device, more specifically, a "palm size" device.
Ever increasing desire for larger screen phones is a result of pursuit of "compromise" between the communication device and the media consumption device.
I carry an iPhone 5 but miss the 4s so much because it was an ideal size (and weight).
I use the phone mostly for the business with occasional Googling, GPS, weather checking and so forth, but if I ever need a larger screen, my iPad and laptop is not too far from me anyway.
Once I came to this conclusion, the palm size phone is more convenient to use for emailing, texting, phone, checking calendar and other usual stuff.
As a business, Apple might go for a larger model as well, but I hope they would also keep offering a smaller size model. 3.5" is a sweet spot for me.
With their success in iPads, particularly the iPad Mini, it is hard to believe Apple would go for much larger size phones.