Davis was loaned out to Chesterfield earlier in the season but a series of injuries earned him a recall to Molineux by Wolves boss Terry Connor.
The 21-year-old impressed sufficiently during six Barclays Premier League appearances to earn the new deal, despite the club's relegation being confirmed last weekend.
Davis said on wolves.co.uk: "This new contract really is the icing on the cake for me.
"It's secured my future at my club, Wolves, the club I want to play for. It really is a dream come true.
"I have been learning the trade whilst I've been out on loan and now I'm back here playing in the best league in the world. It's a big achievement for me.
"Obviously, us getting relegated has been a bitter disappointment but I think that we can bounce back and I would like to play my part in that objective."
Source: PA
Source: PA