This worked for me. Im using a M1 Macbook with iphone 13 and watch series 4 (44mm/wifi/gps)
I followed from this thread: https://forums.developer.apple.com/forums/thread/733153
Steps
Install sysdiagnose profile on iPhone.
Trigger a sysdiagnose by pressing and holding both the Side and Digital Crown buttons on the Watch for two seconds and release, Watch will restart automatically
Restart Xcode and hopefully it may recognise the Watch
My steps were slightly different. Its not 100% guaranteed but worked for me twice (1st when I had accidently removed watch from Xcode, and 2nd time when I changed to a new macbook)
Prereq:
Xcode, Phone and Watch have latest updates
Phone and Watch paired
Phone and Watch are both connected on the same wifi network - important as Xcode connects to both devices over the network.
Developer mode enabled on Phone
Developer mode enabled on Watch
Steps
Disconnect usb cable from phone to macbook, and disconnect usb cable from watch to macbook
In Xcode, open Devices and Simulators, Unpair phone from Xcode, then close Xcode
On phone - hold down volume up, volume down and side button to turn off phone. Then turn phone back on
Open Xcode and open Devices and Simulators
Connect phone to macbook using USB cable. On the phone when prompted to Trust Computer, accept connection
Once paired close Xcode
Connect watch to macbook on USB cable. Make sure the watch is connected on the wifi
On the watch - hold down crown and side button to restart watch
On the watch when prompted to Trust Computer, accept connection (Cant remember if I had to open Xcode first) - I think this step is important for Xcode to detect watch, and requires the watch to be on the wifi
Open Xcode, open Devices and Simulators and watch should appear
Notes:
The Trust Computer connection seems to be a key step and in order by the phone first followed by the watch. For the watch it seems to relie on the Wifi to work, however I cant confirm as it also maybe connecting via the phone.
The Wifi is a key prereq for both Watch and Phone. I had to recheck my Watch wfi settings as sometimes it would lose connection and the Trust Computer step would not work
If not working, try turning off and on developer modes on both devices before repeating steps. I think had I do to this when I changed laptops
I didnt have to re-pair the phone and watch, so you can eliminate this step