I think its fairly well known that BMW V8s are quite strong engines. Now the V8 (especially derived from the new V10 platform) will be especially able to handle high revs for excessive amounts of time. I think in this case, it boils down to a question of marketing and if BMW cares about bringing the power (and torque, this is a V8 afterall) close to that of the M5.

I think with a 4.0L V8 in the M3, they could easily bring it to about 425-430HP. Then there is talk of using the turbo technology recently being employed by BMW across their engine range onto the M cars. These turbos are primarily intended to improve acceleration to bring the engines up on rev in the low ranges, but they would have an effect on top end power too theoretically, maybee bringing the car up to 450HP. Now does BMW want to sell an M3 with 450HP next to an M5 with 500HP. My head (pure speculation) says NO. So the car will stay at 420HP which gives it a decent difference from the M5 but still gives M3 buyers the ever important "value" card. What I mean is that M3 owners can still say "I get more per dollar then with an M5", which believe it or not still counts with alot of regular car buyers.