Background Wearable devices have been widely used in clinical studies to study daily activity patterns, but the analysis remains a major obstacle for researchers. Objective This study proposes a novel method to characterize sleep-activity rhythms using actigraphy and further use it to describe early childhood daily rhythm formation and examine its association with physical development. Methods We developed a machine learning–based Penalized Multiband Learning (PML) algorithm to sequentially infer dominant periodicities based on the Fast Fourier Transform (FFT) algorithm and further characterize daily rhythms. We implemented and applied the algorithm to Actiwatch data collected from a cohort of 262 healthy infants at ages 6, 12, 18, and 24 months, with 159, 101, 111, and 141 participants at each time point, respectively. Autocorrelation analysis and Fisher test in harmonic analysis with Bonferroni correction were applied for comparison with the PML. The association between activity rhythm features and early childhood motor development, assessed using the Peabody Developmental Motor Scales-Second Edition (PDMS-2), was studied through linear regression analysis. Results The PML results showed that 1-day periodicity was most dominant at 6 and 12 months, whereas one-day, one-third–day, and half-day periodicities were most dominant at 18 and 24 months. These periodicities were all significant in the Fisher test, with one-fourth–day periodicity also significant at 12 months. Autocorrelation effectively detected 1-day periodicity but not the other periodicities. At 6 months, PDMS-2 was associated with the assessment seasons. At 12 months, PDMS-2 was associated with the assessment seasons and FFT signals at one-third–day periodicity (P<.001) and half-day periodicity (P=.04), respectively. In particular, the subcategories of stationary, locomotion, and gross motor were associated with the FFT signals at one-third–day periodicity (P<.001). Conclusions The proposed PML algorithm can effectively conduct circadian rhythm analysis using time-series wearable device data. The application of the method effectively characterized sleep-wake rhythm development and identified the association between daily rhythm formation and motor development during early childhood.