Dexter Blackstock struck on the stroke of half-time to give Forest their fourth straight win and go joint fifth on 21 points, just five points off the top of the table.
Newcastle began the day at the Championship summit but West Brom crept above them earlier in the day and a third game without a win kept the Magpies off their perch on goals scored.
Blackstock's sixth of the season was just reward for a dominant first-half performance by Forest and although the visitors held on for a notable scalp, Davies was quick to rule Forest out as promotion contenders.
"We're not ready this season, I keep saying that to everybody," he told Sky Sports. "We're still looking at consolidation and steady progress.
Work in progress"We're very much a club that's a work in progress, we've got a lot of work to do with these young players and we saw their inexperience in the second half.
"They've got to learn how to dominate games in the second half when they've been in so much control in the first 45 minutes.
"I thought we were excellent in the first half and could have been two or three goals to the good," Davies added.
"We moved the ball around, possession was good and our movement off the ball was first class.
"But Newcastle showed what a good side they are after half-time and also showed us what we have to aspire to.
"We gave the ball away too many times in the second half, and by shooting ourselves in the foot, it might have cost us.
"We were on the back foot for too long but we showed a lot of character to hang in there and protect the lead we had earned.
"But I am very proud of the way my players are maturing and developing. We are learning and improving all the time and games like this can only help us in our development."
Davies also recommended that Newcastle give the managerial position to Chris Hughton on a permanent basis, and the Magpies' caretaker boss remained positive despite their recent slump.
"We paid the price for a poor first-half performance when they were much better than us," he said.
Bigger challenge"I just wanted to get the players in without conceding a goal and see if we could change and improve things.
"But Forest scoring just before half-time left us with a bigger challenge and although we responded to it, we just could not get the break.
"We knew how difficult it would be because Forest have been on an excellent run but we were looking to get something from the match.
"It's not pleasant to be leaving here without something but we are still at the end of the table where we want to be."