I have the same problem. It seems like there is no solution. That's really bad.

Restarting Xcode worked.

Still here on watchOS 7.5; It's been a day I'm fighting to understand why Sign In With Apple is not working on my new watch app (as it is done with SwiftUI and uses exactly the same code on both iOS and watchOS, and works on iOS), but it seems to be a watchOS issue, not about the app itself.