The Boys in Green boss hailed the progress of the 23-year-old and says that the fact he is playing regularly for the Toffees is a massive boost for the Ireland team
Since taking over as manager of Ireland, O'Neill has been in attendance at a number of Everton games to assess the club's Irish contingent, which includes Aiden McGeady, Seamus Coleman and Darron Gibson, as well as McCarthy.
And, having watched the 23-year-old in action for the Toffees in their 1-0 defeat against Chelsea on Saturday, the former Celtic and Aston Villa boss was impressed, but believes that he must continue to assert his authority on the pitch.
"He did very well and it's about taking games by the scruff of the neck now," O'Neill was quoted as saying by the Irish Independent.
"Once in the second half, he drove forward by 30-40 yards with the ball and those are the things he can do."
The 61-year-old believes that McCarthy's progression will give the player confidence and suggested that it would ultimately be a boost to the Republic of Ireland team.
"The longer he is playing as their first choice in the side, the more confidence he's getting," he added.
"And you would think that can only benefit us. It's what he's doing now, taking games by scruff of the neck."