The 21-year-old - formerly of Liverpool - joined the Hornets in 2016 but has featured just nine times in the Premier League since.
The Black Cats are preparing for a campaign in League One following successive relegations but have been given funds by new owner Stewart Donald to strengthen this summer.
"We need more players in the forward areas and Jerome is somebody who fits into that bracket, as he can play in multiple positions across the frontline," Sunderland manager Jack Ross told the club's website.
"I'm pleased to get him in and he's at a stage in his career where he needs to play games, so he's hungry to prove himself and he's got a big opportunity here to do that."
Sunderland kick off the League One campaign at home to Charlton Athletic on August 4.