Watkins, signed from Brentford for £28m this summer, grabbed a first-half hat-trick against the reigning champions.
Smith said: "The performance was outstanding from start to finish. We created an awful lot of chances against an exceptional defence and team. We had to work very hard.
"We have carried on the momentum from the end of last season but we have added quality to that. People have questioned Ollie Watkins' price. That has probably trebled now. He has hit the bar when he had a really good chance and Ross Barkley had two or three good chances as well.
"Football is about small margins and our goalkeeper had to make a couple of good saves when it was 1-0 or 2-0."