Of course will the rumored iWatch have the M7 Co-processor - it works great already in the iPhone 5s

iOS 8 Beta Health App Points to an M7 Powered Apple iWatch - I4U News | forbes

The iPhone hardware will act as a fitness tracker, but for more fidelity, accuracy, and convenience, a wearable device would be better suited. Software wise, the job is done. Hardware wise, just move the M7 into a fitness band or a watch-like housing, and the job is done. As for selling it…  the hard work of proving that a tracker can work for you has already been completed by the iPhone itself, any salesman worth his salt should be able to sell an M7 enabled wearable.

Uhm, yes of course. The M7 co-processor has always been the perfect match for the rumored iwatch. It is already counting all my steps in my iPhone 5s everyday without draining the battery. It's awesome really. You can't turn it off but you actually don't have to. It's awesome to have it in the background counting my steps and distance without me having to do anything. And I'm sure with all the new rumored sensors the M7 will be able to measure a lot more with the new devices this Fall. Very exciting!