Help! Sensitivity label applied to whole tenant mistakenly with Watermark

The watermark will only apply to files that has been opened by a person.

So in your 1st step: Disable the policy that applies the watermark

2nd step: In the Purview activity explorer, go through the period where the watermarking policy was applied then file out and export only the items where (1) Sensitivity label applied and (2) Manual. You will then get a list of documents that are likely to have the watermark. It will export a file that contains the file path.

3rd step: Do a spot check to confirm that they indeed have a watermark. 

4th step: Reapply the label policy WITHOUT the watermark turned on. Since they need to be removed by opening the document and re-label to be removed. You'll likely require an RPA process to open files and re-label the data.