With Wanderers only above the Premier League relegation zone on goal difference before the weekend's action gets under way, McCarthy has made it clear he does not expect to see a repeat of that kind of display when they face Birmingham.
McCarthy, who is set to recall Kevin Doyle, Matt Jarvis, Stephen Ward and Marcus Hahnemann to the side humbled at Palace, said: "We just didn't play well. It is the worst we have played in the three-and-a-half years I have been here.
"I never saw it coming but I am not going to dwell on it any longer.
"We have had a good response in training but the response I am requiring is on Sunday.
"The last thing I will say about it is there is only one good thing to come out of the game and that is that we can't play worse than that and we have to play better.
"It is perfect motivation for a local derby and we have played well in the Premiership.
"We have put in some really good performances and I would envisage another good one on Sunday."
McCarthy knows it will be a stern test against an in-form Birmingham and he added: "They came to Molineux in November and beat us deservedly. They are having a fabulous season.
"At the moment they have got the balance right. They are hard to beat and if you remain that and stay in games they are always likely to nick a goal because they have got some good players."
"The important thing for us to stay in games and not be 1-0 down and chasing it.
"Against Palace, there were question marks levelled at the team about their desire and guts and application and yet three days before we fought back at Hull to get a point and show what the team and the club is about, and I am sure we will do it again on Sunday.
"It is a pressurised game but more so for us than them. I think the only pressure on Birmingham is that they are playing their local rivals.
"They have been fabulous and I don't think there is to much pressure on Alex McLeish."
McCarthy has been impressed by the way Birmingham have performed this season after being promoted along with Wolves last term and accepts the extra experience in the City side has been crucial.
He added: "There is no question they have a bit more experience than us.
"Stephen Carr and Liam Ridgewell have got experience, the two centre-halves, Scott Dann and Roger Johnson, have been excellent and I never doubted they would be.
"Barry Ferguson and Lee Bowyer in the middle of the park are both very experienced players.
"Sebastian Larsson, wide right, and James McFadden, wide left, are both very experienced in the Premiership.
"They have got more experience than us. There is no doubt about that and I think that has certainly helped them."
As well as the return of Doyle, Jarvis, Ward and Hahnemann, Wolves also have midfielder Adlene Guedioura available for the short trip to St Andrew's.
Guedioura, who arrived on loan from Charleroi last month, returns to the squad after being ineligible for the FA Cup tie.