Back when the iPhone 4 came out everyone else was already going 4"+. I was shocked that Apple kept 3.5".
I compared the iPhone 4 with the HTC 4.3" at the time and MUCH preferred the HTC look, size and feel. I opted to skip the iPhone 4 and just held onto the 3GS (Apple ecosystem and all that). Several years later and I'm still on an iPhone (4S), but would love to see a 4.3-4.5" screen. The 4" 16:9 iPhone 5 screen was largely pointless IMO.
Also, going larger, Apple would
have to round out the back of the phone. Going larger and keeping it square would be terrible to hold and pocket and make it even
more susceptible to bending.
I'm slowly getting over the fact that we're just expecting way too much out of such small devices. The iPhone is terrible to browse the internet on, terrible to type on and too small for all but basic puzzle games and too small to seriously watch videos. Making the iPhone 5 one icon row taller improves none of these things.
But hey, I can reach the whole screen with my thumb.