Dr Watson is obviously the secondary character but his very 'normalness' contrasts and highlights the extraodinary mannerisms and behaviour of Holmes.
The fact that Watson is a close friend of Holmes reassures the reader that Holmes is acceptable and not too strange as to be unsettling. Watson provides much needed balance to the plot.
Further, he acts as a foil - by explaining his reasoning to Watson, Holmes is able to enlighten the reader as to how and why he arrived at his conclusion.
You need to have secondary characters in order that your main character can interract with them. A character is revealed not only by how they look and what they do, but what secondary characters say about them and to them, and how they relate to them.
In Great Expectations, for instance, Pip's snobbishness can be seen in how he reacts to Joe Gargery when he visits, yet his underlying 'gentlemanliness' can be seen in how he treats Wemick's Aged P.