Laughter is a powerful auditory stimulus conveying positive emotion. Here we demonstrate that laughter modulates visual perception of facial expressions. We simultaneously presented a sound of a laughing child and a schematic face with a happy (upward-curved mouth) or sad (downward-curved mouth) expression. The emotional face was presented either alone or among a crowd of neutral faces with or without laughter. Participants indicated the valence and magnitude of the perceived expression by selecting a curved segment that most closely resembled the curvature of the mouth of the emotional face. In this way, we were able to measure how laughter influenced both the strength (mean perceived curvature) and tuning (standard deviation of perceived curvature) of the perception of happy and sad facial expressions. We found that when a single emotional face was presented, laughter enhanced the strength of a congruent happy expression. In contrast, when an emotional face was presented in a crowd of neutral faces, laughter enhanced the perceived signal strength of an incongruent sad face. These effects were transient in that they occurred on a trial-to-trial basis. Laughter also produced a sustained effect of selectively enhancing the reliability of perceiving happy faces on no-sound trials following laughter trials compared to a control block with no-sound trials only. These effects arise from interactive processing of auditory laughter and visual facial expression rather than from abstract semantic interactions because presenting the spoken word “laugh” instead of laughing sounds produced no effects. In summary, simultaneous laughter makes a single happy expression appear happier, but makes an incongruent sad expression stand out in a crowd; these opposite effects based on single versus multiple faces preclude response bias. Laughter also produces a sustained effect of fine-tuning the perception of happy faces. These results demonstrate multifaceted auditory-visual interactions in the processing of facial expressions.