diff --git a/src/Assets/TestProjects/WatchAppWithLaunchSettings/Program.cs b/src/Assets/TestProjects/WatchAppWithLaunchSettings/Program.cs
new file mode 100644
index 000000000000..143f5183dfec
--- /dev/null
+++ b/src/Assets/TestProjects/WatchAppWithLaunchSettings/Program.cs
@@ -0,0 +1,2 @@
+Console.WriteLine("Started");
+Console.WriteLine($"Environment: {Environment.GetEnvironmentVariable("EnvironmentFromProfile")}");
diff --git a/src/Assets/TestProjects/WatchAppWithLaunchSettings/Properties/launchSettings.json b/src/Assets/TestProjects/WatchAppWithLaunchSettings/Properties/launchSettings.json
new file mode 100644
index 000000000000..f8b1abd49b2b
--- /dev/null
+++ b/src/Assets/TestProjects/WatchAppWithLaunchSettings/Properties/launchSettings.json
@@ -0,0 +1,10 @@
+{
+    "profiles": {
+      "app": {
+        "commandName": "Project",
+        "environmentVariables": {
+          "EnvironmentFromProfile": "Development"
+        }
+      }
+    }
+  }
diff --git a/src/Assets/TestProjects/WatchAppWithLaunchSettings/WatchAppWithLaunchSettings.csproj b/src/Assets/TestProjects/WatchAppWithLaunchSettings/WatchAppWithLaunchSettings.csproj
new file mode 100644
index 000000000000..74abf5c97664
--- /dev/null
+++ b/src/Assets/TestProjects/WatchAppWithLaunchSettings/WatchAppWithLaunchSettings.csproj
@@ -0,0 +1,10 @@
+<Project Sdk="Microsoft.NET.Sdk">
+
+  <PropertyGroup>
+    <OutputType>Exe</OutputType>
+    <TargetFramework>net6.0</TargetFramework>
+    <ImplicitUsings>enable</ImplicitUsings>
+    <Nullable>enable</Nullable>
+  </PropertyGroup>
+
+</Project>
diff --git a/src/BuiltInTools/dotnet-watch/HotReload/BlazorWebAssemblyDeltaApplier.cs b/src/BuiltInTools/dotnet-watch/HotReload/BlazorWebAssemblyDeltaApplier.cs
index 54aac04ef06f..c65ab9789b2e 100644
--- a/src/BuiltInTools/dotnet-watch/HotReload/BlazorWebAssemblyDeltaApplier.cs
+++ b/src/BuiltInTools/dotnet-watch/HotReload/BlazorWebAssemblyDeltaApplier.cs
@@ -10,11 +10,9 @@
 using System.Linq;
 using System.Net.WebSockets;
 using System.Text;
-using System.Text.Json;
 using System.Threading;
 using System.Threading.Tasks;
 using Microsoft.CodeAnalysis.ExternalAccess.Watch.Api;
-using Microsoft.Extensions.HotReload;
 using Microsoft.Extensions.Tools.Internal;
 
 namespace Microsoft.DotNet.Watcher.Tools
@@ -22,6 +20,7 @@ namespace Microsoft.DotNet.Watcher.Tools
     internal class BlazorWebAssemblyDeltaApplier : IDeltaApplier
     {
         private static Task<ImmutableArray<string>>? _cachedCapabilties;
+        private static readonly ImmutableArray<string> _baselineCapabilities = ImmutableArray.Create<string>("Baseline");
         private readonly IReporter _reporter;
         private int _sequenceId;
 
@@ -48,7 +47,7 @@ async Task<ImmutableArray<string>> GetApplyUpdateCapabilitiesCoreAsync()
             {
                 if (context.BrowserRefreshServer is null)
                 {
-                    return ImmutableArray<string>.Empty;
+                    return _baselineCapabilities;
                 }
 
                 await context.BrowserRefreshServer.WaitForClientConnectionAsync(cancellationToken);
@@ -58,14 +57,14 @@ async Task<ImmutableArray<string>> GetApplyUpdateCapabilitiesCoreAsync()
                 var buffer = ArrayPool<byte>.Shared.Rent(32 * 1024);
                 try
                 {
-                    // We'll query the browser and ask it send capabilities. If the browser does not respond in 10s, we'll assume something is amiss and return
-                    // no capabilities. This should give you baseline hot reload capabilties.
+                    // We'll query the browser and ask it send capabilities. If the browser does not respond in a short duration, we'll assume something is amiss and return
+                    // baseline capabilities.
                     var response = await context.BrowserRefreshServer.ReceiveAsync(buffer, cancellationToken)
                         .AsTask()
-                        .WaitAsync(TimeSpan.FromSeconds(10), cancellationToken);
+                        .WaitAsync(TimeSpan.FromSeconds(15), cancellationToken);
                     if (!response.HasValue || !response.Value.EndOfMessage || response.Value.MessageType != WebSocketMessageType.Text)
                     {
-                        return ImmutableArray<string>.Empty;
+                        return _baselineCapabilities;
                     }
 
                     var values = Encoding.UTF8.GetString(buffer.AsSpan(0, response.Value.Count));
@@ -83,7 +82,7 @@ async Task<ImmutableArray<string>> GetApplyUpdateCapabilitiesCoreAsync()
                     ArrayPool<byte>.Shared.Return(buffer);
                 }
 
-                return ImmutableArray<string>.Empty;
+                return _baselineCapabilities;
             }
         }
 
diff --git a/src/BuiltInTools/dotnet-watch/Program.cs b/src/BuiltInTools/dotnet-watch/Program.cs
index a60b3de5d031..246f07e76291 100644
--- a/src/BuiltInTools/dotnet-watch/Program.cs
+++ b/src/BuiltInTools/dotnet-watch/Program.cs
@@ -278,7 +278,7 @@ private async Task<int> MainInternalAsync(IReporter reporter, CommandLineOptions
                 _reporter.Output("Polling file watcher is enabled");
             }
 
-            var defaultProfile = LaunchSettingsProfile.ReadDefaultProfile(_workingDirectory, reporter) ?? new();
+            var defaultProfile = LaunchSettingsProfile.ReadDefaultProfile(processInfo.WorkingDirectory, reporter) ?? new();
 
             var context = new DotNetWatchContext
             {
diff --git a/src/Tests/dotnet-watch.Tests/DotNetWatcherTests.cs b/src/Tests/dotnet-watch.Tests/DotNetWatcherTests.cs
index fc71b74b3f3b..e1eb948f67e8 100644
--- a/src/Tests/dotnet-watch.Tests/DotNetWatcherTests.cs
+++ b/src/Tests/dotnet-watch.Tests/DotNetWatcherTests.cs
@@ -129,5 +129,44 @@ public async Task RunsWithRestoreIfCsprojChanges()
             message = await app.Process.GetOutputLineStartsWithAsync(messagePrefix, TimeSpan.FromMinutes(2));
             Assert.Equal(messagePrefix + " --no-restore -- wait", message.Trim());
         }
+
+        [CoreMSBuildOnlyFact]
+        public async Task Run_WithHotReloadEnabled_ReadsLaunchSettings()
+        {
+            var testAsset = _testAssetsManager.CopyTestAsset("WatchAppWithLaunchSettings")
+                .WithSource()
+                .Path;
+
+            using var app = new WatchableApp(testAsset, _logger);
+
+            app.DotnetWatchArgs.Add("--verbose");
+
+            await app.StartWatcherAsync();
+
+            await app.Process.GetOutputLineAsync("Environment: Development", TimeSpan.FromSeconds(10));
+        }
+
+        [CoreMSBuildOnlyFact]
+        public async Task Run_WithHotReloadEnabled_ReadsLaunchSettings_WhenUsingProjectOption()
+        {
+            var testAsset = _testAssetsManager.CopyTestAsset("WatchAppWithLaunchSettings")
+                .WithSource()
+                .Path;
+
+            var directoryInfo = new DirectoryInfo(testAsset);
+            using var app = new WatchableApp(testAsset, _logger)
+            {
+                // Configure the working directory to be one level above the test app directory.
+                WorkingDirectory = Path.GetFullPath(directoryInfo.Parent.FullName),
+            };
+
+            app.DotnetWatchArgs.Add("--verbose");
+            app.DotnetWatchArgs.Add("--project");
+            app.DotnetWatchArgs.Add(Path.Combine(directoryInfo.Name, "WatchAppWithLaunchSettings.csproj"));
+
+            await app.StartWatcherAsync();
+
+            await app.Process.GetOutputLineAsync("Environment: Development", TimeSpan.FromSeconds(10));
+        }
     }
 }
diff --git a/src/Tests/dotnet-watch.Tests/Utilities/WatchableApp.cs b/src/Tests/dotnet-watch.Tests/Utilities/WatchableApp.cs
index d8a036559988..415f9b802219 100644
--- a/src/Tests/dotnet-watch.Tests/Utilities/WatchableApp.cs
+++ b/src/Tests/dotnet-watch.Tests/Utilities/WatchableApp.cs
@@ -38,6 +38,8 @@ public WatchableApp(string sourceDirectory, ITestOutputHelper logger)
 
         public string SourceDirectory { get; }
 
+        public string WorkingDirectory { get; set; }
+
         public Task HasRestarted()
             => HasRestarted(DefaultMessageTimeOut);
 
@@ -76,7 +78,7 @@ public void Start(IEnumerable<string> arguments, [CallerMemberName] string name
 
             var commandSpec = new DotnetCommand(_logger, args.ToArray())
             {
-                WorkingDirectory = SourceDirectory,
+                WorkingDirectory = WorkingDirectory ?? SourceDirectory,
             };
             commandSpec.WithEnvironmentVariable("DOTNET_USE_POLLING_FILE_WATCHER", "true");
             commandSpec.WithEnvironmentVariable("__DOTNET_WATCH_RUNNING_AS_TEST", "true");