O'Neill has no qualms with the result at the Etihad Stadium on Saturday and admits City deserved their 3-0 victory.
However, the Sunderland boss believes his side were guilty of giving away possession too cheaply and believes his side need to show more confidence when they take on the top teams.
He told the Shields Gazette: "My complaint is about us - when we had possession we gave it away too easily.
"We could have been punished more before the break for that but having got to half-time with just one goal in it, we were hopeful for the second half.
"They were better than us though."
He added: "It's a setback conceding so early, but it shouldn't be fatal - the game hadn't taken any real pattern at that stage.
"It was just my feeling that maybe we didn't have the total self-belief you need coming to places like this.
"We were second best all afternoon and we should have done better.
"At the end of the day we didn't hold on to the ball well enough and we didn't pass it well enough."
The defeat at City was Sunderland's first Premier League loss of the campaign but they have managed just one win in their opening six fixtures ahead of Newcastle's visit after the international break.