Watson moved on to play for Everton for £900,000 on 22 August 1986 after six years at Norwich. He remained at Goodison Park for 15 years, his first game for them coming on 23 August 1986 when they won 2–0 at home to Nottingham Forest on the opening day of the league season. He helped them win the league title in their first season, and also helped them reach the FA Cup final in 1989, where they lost 3–2 to local rivals Liverpool in extra time.