I’m having a similar problem. No matter what I set the quality setting to, a 646kb file turns into a 2MB file after trying to apply an image watermark. I’ve tried different formats/sizes for my watermark image and it’s still a problem. It feels as though the quality setting is not being used at all.
I did not have the same experience with a text watermark. That only added a couple kb to my file sizes. Could be a temporary workaround.
Also interesting, is that running a plugin like Smush afterward applying the image watermark to try and reduce the file size didn’t work.