If Bush doesn't recover from his slide, he'll lose the White House. And it's entirely possible that Republicans will lose the Senate (see here and here). A Bush loss might also cut into Republicans' majority in the House.
Republicans could nevertheless stymie Kerry's domestic agenda. Even if Democrats were to re-take the Senate by a narrow margin that certainly wouldn't ensure the passage of Kerry's agenda in the upper body. (Look at what Democrats have been able to do to Bush's appellate court nominees.) Throw in Republican control of the House and Kerry's agenda could be DOA, unless he's able, like Clinton, to evoke a popular backlash against Republican "meanies".
Assuming the best on the domestic front -- that is, deadlock -- what about the war on terror? All wouldn't be lost if Kerry were to win the White House. He says dangerous multilateralist things about defense policy. But, in these times of clear and present danger, even a Democrat president will put defense above the trappings of internationalism. A massive failure to defend the homeland or to secure vital overseas interests would ensure a rout in the mid-term elections and a one-term presidency, if not impeachment.